"Public and private market investors have indiscriminately been attributing huge premiums to AI companies, and the party continues - the music is still playing and people are still dancing. But when the music stops, investors will scramble for assets in a frantic game of musical chairs. We have seen this all before. As with the dot com bubble, the long-term potential of the technology is massive; the over-valuations are just part of the initial hype."
"Among the largest AI companies, there has been a pattern of suppliers investing in customers and the issue of circular investing is widespread. With Nvidia investing in OpenAI, for example, Nvidia, directly or indirectly, supplies OpenAI with GPUs [graphics processing units] and the investment enables OpenAI to buy more. A similar pattern can be found with Nvidia investing in Coreweave, which buys GPUs from Nvidia and sells GPU capacity to Open AI and other LLM (Large Language Model) providers."
"Meanwhile major cloud providers have invested in OpenAI and Anthropic, and they sell them cloud compute for training and inference. The pattern repeats downstream where OpenAI and other LLM providers can invest in other companies that can build their applications on OpenAI's ChatGPT. There are risks with these entangled partnerships, and it is unhealthy for the ecosystem at large. Although the largest companies can absorb a drop in valuations, other AI companies have been dragged along by the hype, especially in the private markets."
Public and private investors have applied large valuation premiums to AI companies, creating an exuberant market environment that risks a sharp correction. Current sentiment resembles past bubbles where long-term technology potential coexists with excessive short-term valuations and a slide into the Trough of Disillusionment. Major AI firms show circular capital flows: suppliers invest in customers and cloud providers invest in model creators while selling compute. These entanglements concentrate incentives and obscure true value, producing systemic risk in private markets. Large incumbents can absorb valuation shocks, whereas smaller AI companies have been propelled to unrealistic expectations by headline financings.
Read at Fortune
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