Is The AI Bubble About To Pop?

The $100 billion red flag.

Photo by Milad Fakurian on Unsplash

You know that feeling when someone is overly inflating a balloon, and you can’t help but wince? It’s a sense of “be careful, that is going to hurt!” combined with bracing for the inevitable BANG. That is how I, and many others, have felt for years now regarding AI. We have been urging the world to brace for when this obvious bubble will burst for so long now, it feels like we are crying wolf. But over the past few months, even the finance bros have begun to wake up, especially with Nvidia’s $100 billion investment in OpenAI. This represents one of the most concerning red flags possible, and it is foreshadowing a catastrophic collapse. Let me explain.

If you need to know why the AI industry is a bubble, read my previous article here. Essentially, AI has been overhyped, and not only can it not deliver on its promises, but the limitations of the technology also mean that it cannot significantly improve beyond its current state. In other words, it isn’t profitable for people to use generative AI or to operate a generative AI company. This means that the hundreds of billions, if not trillions, of dollars that have been poured into this technology won’t generate a return. It is a bubble. And, once investors figure that out, they will try to exit quickly; the value of the entire industry will tank, taking anything associated with it, like indexes, banks, or the chip industry, down with it too.

Okay, so why is Nvidia’s investment such a red flag? Well, because it is circular financing.

Nvidia is the AI chip maker. Their chips are the most powerful and efficient on the market, so they power the majority of the data centres used by AI startups, specifically OpenAI. To give you an idea of how significant this is, Microsoft, the main backer of OpenAI, spent 47% of its 2024 expenditure on Nvidia chips to supply data centres to OpenAI, making Microsoft Nvidia’s largest customer.

Now, OpenAI is wildly unprofitable. It is set to post annual losses in the hundreds of billions of dollars for the foreseeable future (read more here). The company is also closely tied to Nvidia, with their plans to reduce dependency on Nvidia chips being half-hearted at best. So Nvidia is set to make an insane amount of money from OpenAI for years to come. It makes no sense for Nvidia to even consider investing in them.

Then why on Earth is Nvidia planning to invest $100 billion into OpenAI in return for equity in the company? Moreover, why is this $100 billion not actually a cash investment but instead allowing OpenAI to “lease” essential GPU chips for that equivalent value from Nvidia?

As a business move, it makes no sense. It won’t suddenly make OpenAI’s dismal outlook shine. It won’t increase Nvidia’s profits.

And let’s not forget $100 billion is a serious amount of money! That is enough to buy nearly three million Tesla Model 3s (which is only slightly less than how many have ever been built) and over 7.6 times what Microsoft has invested in OpenAI, which has bought them a 49% stake in the organisation! It is a stupidly large sum of money, and yet Nvidia seems to be content spaffing it away.

But they aren’t really — this is circular financing, and tech bros have been doing it since the ‘90s.