OpenAI bypassed advisers on $1.5 trillion chip deals

Key takeaways

OpenAI CEO Sam Altman and a small group of executives struck deals worth as much as $1.5 trillion with chipmakers and cloud providers this year, largely bypassing the company's external bankers and lawyers in favor of an internal team focused on technical requirements over financial considerations.

Altman relied on a select group of lieutenants, including president Greg Brockman, CFO Sarah Friar, and other recently promoted executives, to negotiate major chip supply agreements with Nvidia, Oracle, AMD, and Broadcom, according to multiple reports citing people familiar with the matter. The unconventional approach placed technical aspects of the chips at the forefront, with financial details treated as secondary concerns.

Wall Street rallies despite questions about deal structure

The massive agreements triggered significant market movements, with companies involved seeing substantial stock price increases.

AMD shares jumped 24% in a single trading session following its deal announcement with OpenAI, adding approximately $63 billion to the company's market value. Oracle's stock surged by $244 billion in one day after announcing its participation in OpenAI's infrastructure projects.

Neither OpenAI nor Nvidia sought outside advice on their recent arrangement, under which Nvidia agreed to invest up to $100 billion in OpenAI in exchange for the AI company committing to spend up to $350 billion on Nvidia's advanced processors, according to the Financial Times report.

The deals collectively give OpenAI access to more than 26 gigawatts of computing capacity over the next decade, roughly equivalent to the power output of 26 nuclear reactors.

Industry estimates suggest each gigawatt of AI computing capacity costs approximately $50 billion to deploy at current prices, bringing the total projected expenditure to around $1.3 trillion by 2030.

Concerns mount over interconnected agreements

The arrangements have drawn scrutiny from analysts who see troubling parallels to vendor financing patterns that contributed to the dot-com bubble collapse in the early 2000s.

The deals' circular nature has become a focal point of concern, with companies investing in each other while simultaneously conducting massive commercial transactions.

Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, said the OpenAI-Nvidia deal reminded him of companies from the late 1990s, though this transaction is "so much bigger in terms of dollars."

Bespoke Investment Group expressed reservations in a note to clients, stating that the announcement represents "a troubling signal about how self-referential the entire space has become." The firm added that if Nvidia has to provide the capital that becomes its revenues in order to maintain growth, "the whole ecosystem may be unsustainable."

Gil Luria, a managing director at D.A. Davidson Financial Group who covers technology, was blunt in his assessment, telling media outlets that OpenAI is "in no position to make any of these commitments."

Computing power shortage drives aggressive expansion

OpenAI executives have defended the massive infrastructure investments as necessary responses to severe computing capacity constraints limiting AI development.

Greg Brockman told CNBC that the company cannot launch many ChatGPT features and other products that could generate revenue because of insufficient computing power.

"We have to do this," Brockman said. "This is so core to our mission if we really want to be able to scale to reach all of humanity, this is what we have to do."

CFO Sarah Friar emphasized the industry-wide nature of the challenge, stating that technology booms require bold infrastructure bets. She drew parallels to internet development, noting that concerns about overbuilding during the internet's early days now seem misplaced given current demand.

"There's not enough compute to do all the things that AI can do, and so we need to get it started," Friar said in public comments.

OpenAI CEO Sam Altman has argued that compute infrastructure will form the foundation of the future economy, justifying the company's willingness to operate at a loss while prioritizing growth and infrastructure investments.

Revenue shortfall raises sustainability questions

Despite the ambitious spending commitments, OpenAI's current financial position presents challenges.

The company is pulling in approximately $13 billion in annual recurring revenue, with 70% coming from consumer ChatGPT subscriptions.

However, the company reportedly plans to burn through $115 billion through 2029.

A Bain & Company report found that AI companies would need $2 trillion in annual revenue to fund the infrastructure required to meet projected AI demand by 2030, representing an $800 billion shortfall even if the entire industry collectively invests at maximum capacity.

The web of interconnected investments adds complexity to the financial picture.

OpenAI took a $350 million stake in CoreWeave ahead of its IPO in March, while Nvidia formalized its financial stake in OpenAI by participating in a $6.6 billion funding round in October.

Oracle is spending about $40 billion on Nvidia chips to power one of OpenAI's data centers as part of the $500 billion Stargate project, which also involves SoftBank.

The aggressive dealmaking has helped drive major stock indices to record highs, with the $500 billion artificial intelligence startup now valued as the world's most valuable privately owned company, surpassing SpaceX.

However, questions persist about whether the interconnected commitments represent sustainable growth or an unsustainable feedback loop dependent on continued investor enthusiasm for AI technology.

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