It’s like a buy-one-get-one-free deal, except with billions of dollars’ worth of chips and 10% of AMD.

From Matt Levine

The basic situation is that if OpenAI announces a big partnership with a public company, that company’s stock will go up. Today OpenAI announced a deal to buy tens of billions of dollars of chips from Advanced Micro Devices Inc., and AMD’s stock went up. As of noon today, AMD’s stock was at $213 per share, up about 29% from Friday’s close; it had added about $78 billion of market capitalization.

How do those negotiations go? Like, schematically:

OpenAI: We would like six gigawatts worth of your chips to do inference.

AMD: Terrific. That will be $78 billion. How would you like to pay?

OpenAI: Well, we were thinking that we would announce the deal, and that would add $78 billion to the value of your company, which should cover it.

AMD: …

OpenAI: … 

AMD: No I’m pretty sure you have to pay for the chips.

OpenAI: Why?

AMD: I dunno, just seems wrong not to.

OpenAI: Okay. Why don’t we pay you cash for the value of the chips, and you give us back stock, and when we announce the deal the stock will go up and we’ll get our $78 billion back.

AMD: Yeah I guess that works though I feel like we should get some of the value?

OpenAI: Okay you can have half. You give us stock worth like $35 billion and you keep the rest.

And Allison Morrow 

Under the deal announced Monday, which sent the chip designer’s shares up 23%, AMD is effectively subsidizing demand by issuing OpenAI warrants for up to 160 million shares, investor Paul Kedrosky noted Monday. “That makes OpenAI a 10% shareholder: part customer, part financier — a risk transfer from cash to stock, as well as making OpenAI the largest and thus controlling AMD shareholder,” Kedrosky said.

 

As I wrote here last week, intertwined setups, including some known as “vendor financing,” are common in the frothy world of artificial intelligence. But the many layers of overlap, concentrated among the companies whose stocks have been propping up the US stock market, have made it hard to disentangle how much demand for AI is authentic hunger from customers and investors and how much of it is just capital being recycled to keep up the appearance of progress.

 

Vendor financing — along with the doubling, tripling or quadrupling of companies’ valuations — is one of the unflattering echoes some analysts see in comparing today’s AI frenzy with the late-90s dot-com bubble. Back then, telecom equipment giants like Cisco, Nortel and Lucent borrowed heavily to offer their customers financing deals that essentially ensured sustained demand for telecom equipment.

Because that high-tech equipment was in short supply, customers — many of them startups trying to build out fiber-optic cable — inflated their orders, contributing to a glut that left them reeling when, in 2001, it became clear the tech and telecom companies had overestimated demand. The equipment makers like Cisco were left holding bad debt while the startups went bust.

 

  I’m not a finance guy, let alone the kind of high-powered expert who could guide you through these weeds, but you don’t need a weatherman to know which way the wind blows, and you don’t need an MBA to see the broad outlines of this story.

The value of the Magnificent Seven now exceeds the GDP of the European Union — and that doesn’t include adjacent companies like Oracle, AMD, or Palantir that have also been inflated by the bubble. Most of that value goes away when it bursts, which means the people running these companies have trillions of dollars worth of incentive to keep it going. All sorts of decisions that would range from ill-advised to disastrous viewed in isolation suddenly make sense in this context.

Talk to a robotics engineer and they will almost certainly tell you that bipedal humanoid designs only make sense in a vanishingly small number of use cases. The future may belong to robots, but they’re not going to look like C-3PO. That said, humanoids are part of the larger AI narrative, and so AI bubble companies can spend billions of dollars on this dead-end technology knowing that they will still come out far ahead because it helps keep the bubble going.

Coming back to the finance question: these deals make everything more opaque. They provide all sorts of opportunities for fraud and self-dealing. For those with long memories, they are rife with disturbing precedents.

And yet the stocks keep going up…

Until they don’t.