OpenAI Deals Raise Questions About AI Funding
On Sept. 22, there was a $100 billion OpenAI & Nvidia deal, “to build and deploy at least 10 GW of AI data centers with Nvidia systems.” You’d think, for a $100 billion deal, you’d “finalize the details” before announcing it, because the last sentence in the press release read: “Nvidia and OpenAI look forward to finalising the details of this new phase of strategic partnership in the coming weeks.”
During those “coming weeks,” AMD and OpenAI announced a strategic partnership to deploy 6 gigawatts of AMD GPUs. Now, maybe this doesn’t change things, but the accountant in me was a little uncomfortable about Nvidia using all its current $57 billion of cash plus $43 billion of future profits to ‘invest’ $100 billion in a single customer—to buy Nvidia chips—on which the “profit” would be valued at 50x by investors.
It’s like me setting up a lemonade stand and giving money to a friend to buy my lemonade, getting my own money back, and declaring a profit. The only difference is my lemonade stand isn’t 8% of the S&P 500 index—not that the passive industry seems worried (or is even looking).
With the AMD deal, OpenAI gets a warrant to buy 160 million AMD shares at a knockdown price, which then vest based on deployment and “AMD achieving certain share-price targets.” Huh? OpenAI can’t influence the AMD share price, can they? Well, I guess they could pay full price for those chips, which might mean AMD ‘beats the estimate’ and things get hot enough for OpenAI to sell their shares to fund operations.
This is pure speculation on my part, but they told us in September that they expect to burn through $115 billion of cash in the next few years. And it’s hard to fund $115 billion from their current $13 billion annualized revenue.
OpenAI’s legal team has been working hard because in July, they partnered with Oracle, committing to an investment “that exceeds $300 billion over the next 5 years.” Call it $60 billion a year, which Oracle can’t fund because it only generates $20 billion per annum in operating cash flow and already has $95 billion of debt from buying back stock.
What about Softbank, a partner in the $500 billion Stargate venture? Well, they already have $120 billion in net debt. So is this a bubble? You tell me.
Microsoft was worth $500 billion in the first quarter of 2020 when it generated $2 billion of FCF a quarter, not en route to burning $115 billion. So my conclusion is: lots of commitments, lots of hype, not much cash flow—unless you work there.
The latest Form 144 shows Nvidia’s CEO has sold shares for $736 million in the past three months, and last week, the latest OpenAI funding round allowed staff and former employees to sell $6.6bn worth of shares, valuing OpenAI at $500 billion. Nothing like imputing a ginormous private market value based on 1.3% of shares changing hands.