As the artificial intelligence (AI) revolution sweeps across industries, Nvidia (NASDAQ:NVDA) stands at its heart, its AI chips becoming the backbone of countless operations — from tech giants to startups.
As demand surges, Nvidia’s sales and profits are skyrocketing, with exponential growth fueled by multi-billion-dollar deals.
Nvidia’s second quarter data center segment — where it houses its AI business — saw revenue rocket 56% higher year-over-year to a record $41.1 billion, and now accounts for an astounding 88% of total sales. That is only going to expand as it and its partners continue to grow.
For example, CoreWeave (NASDAQ:CRWV) and OpenAI have signed massive agreements, including a new $6.5 billion expansion — bringing the pact’s total value to $22.4 billion — for CoreWeave to provide AI data centers using Nvidia’s chips and technology.
These partnerships signal an unrelenting appetite for AI infrastructure, with data centers humming with Nvidia’s GPUs. Yet, beneath this boom lies a question: Is this explosive growth a red warning flag? Could the circular nature of these deals, where companies prop each other up, mask vulnerabilities that threaten Nvidia and the broader AI sector?
The stakes are high, and the answer could redefine the industry’s trajectory.
A Circular Web of Deals
The recent deals between Nvidia, CoreWeave, and OpenAI raise eyebrows due to their interdependent structure. Nvidia’s $6.3 billion commitment to buy CoreWeave’s unsold cloud capacity through 2032, alongside CoreWeave’s multi-billion-dollar deal with OpenAI, create a financial loop where each company supports the others’ growth.
Some analysts argue this isn’t a major issue, suggesting these agreements ensure resource allocation and stabilize revenue amid AI’s rapid expansion. However, their circularity invites scrutiny.
If Nvidia’s purchases are less about market demand and more about propping up CoreWeave’s valuation — pegged by some analysts at $75 billion with a $19 billion cash burn rate — it could inflate stock prices artificially, a concern echoed by skeptics who see parallels to past tech bubbles.
Hidden Conflicts and Financial Risks
The interdependence also breeds potential conflicts. Nvidia, a major stakeholder in CoreWeave with an over 5% ownership stake, benefits from higher valuations but risks overexposure if CoreWeave falters.
A recent short report by Kerrisdale Capital on CoreWeave, released earlier this month, amplifies these concerns, labeling its $75 billion valuation as inflated given its high cash burn rate. It suggests the Nvidia deal might be more a lifeline rather than a growth driver because, while it may lock in revenue, it does not address fundamental profitability — a pattern seen in past AI bubble bursts like the 2010s dot-com crash.
Similarly, OpenAI’s reliance on Nvidia chips, even as it explores custom designs with Broadcom (NASDAQ:AVGO), could limit its bargaining power, tying it to a single supplier.
The high cash burn rates — CoreWeave’s $19 billion and OpenAI’s ambitious $500 billion Stargate data center plans to secure 10 gigawatts of capacity for the site — suggest these deals might be desperate moves to sustain momentum rather than organic growth.
Critics argue this could lead to a house of cards, where a single default or market shift triggers a domino effect, eroding investor confidence and stock values.
Overvaluation Concerns and Market Perception
The perception of artificial demand is an additional growing worry. If these deals are more about mutual back-scratching than real market need, the AI sector’s valuation could be a mirage.
High-profile partnerships might mask weak fundamentals, with companies buying services to boost each other’s books rather than serving end-users. It is a game of financial musical chairs where inflated valuations collapse when the music stops.
The lack of transparency in how these deals are priced — especially with Nvidia’s progressive $100 billion OpenAI investment — fuels speculation of insider favoritism, potentially inviting regulatory scrutiny or antitrust probes, further complicating the growth narrative.
Key Takeaway
Are these arrangements as shady as they appear, or are supporters right that it’s not a major problem? The circular nature of the deals suggest they are just a calculated strategy to lock in AI dominance, not a sinister plot.
Nvidia’s ecosystem thrives on such synergies, and the industry’s growth — projected at a multi-trillion-dollar scale by 2030 — relies on such partnerships. However, the risks of overvaluation and dependency does warrant caution.
Investors need to keep a close watch on cash flow metrics and demand signals, as artificial demand could lead to a sharp correction if growth stalls. For now, the AI boom continues, but a prudent approach — balancing optimism with a good dose of skepticism — will help investors best navigate this high-stakes game.
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