OpenAI deals with AMD and Nvidia may lead to a ‘show me the money’ moment
OpenAI wants to spend trillions on AI infrastructure. It needs some help to do so.
OpenAI deepened its claim in the artificial intelligence gold rush Monday through a multibillion-dollar deal with Advanced Micro Devices. It just isn’t clear how it’s going to pay for it.
AMD said it inked a deal with OpenAI that could bring in billions in annual revenue for the chip maker and ultimately give the ChatGPT creator a 10% stake.
The agreement followed a similar pact between OpenAI and market leader Nvidia late last month. In that deal, OpenAI, still a private not-for-profit entity, would reportedly surrender an equity stake to Nvidia, which is helping it build out its AI infrastructure.
OpenAI CEO Sam Altman, who now sits as an effective kingmaker in the global AI investment narrative through his ties to both Nvidia, AMD, and the U.S. government’s Stargate project, has said he plans to spend trillions of dollars building out OpenAI’s data centers in the “not very distant future."
He is probably not wrong about the price tag. Combining the 10 gigawatt deal with Nvidia and Monday’s six gigawatt pact with AMD, OpenAI is now looking to deploy, or buy AI GPUs with, enough power to light up all 12 million homes in Texas.
No one is sure what the cost for that kind of computing heat is going to be, although it is safe to say Altman’s forecast is pretty close. But with only a reported $4.3 billion in current revenue, and a bottom line loss of $2.5 billion, OpenAI isn’t going to do this alone.
And that is what might worry some investors looking at the feedback loop of financing that OpenAI is securing.
Reports suggest Oracle, one of Nvidia’s biggest chip customers, booked a $300 billion contract to provide computing power to OpenAI, which is also committed to buying an unspecified amount of Nvidia chips.
That leaves billions of dollars flowing from OpenAI into Oracle, then back into Nvidia, then back into OpenAI.
The AMD deal, meanwhile, gives OpenAI warrants for the right to buy 160 million shares of AMD at increasingly higher valuations, based on contract milestones. The warrants will cost a penny a piece and vest in various tranches, the first of which is expected in the second half of next year.
“The more OpenAI deploys the more revenue we get, and they get to share in the upside," AMD CEO Lisa Su told investors on Monday.
“The circularity makes me nervous," legendary hedge fund investor Paul Tudor Jones told CNBC on Monday when asked about the broader nature of AI infrastructure financing.
OpenAI isn’t anywhere near to the point of being able to finance its ambitions with revenue.
Earlier this year, the tech news website The Information said OpenAI is forecasting $125 billion in revenue in 2029. That would be a compound annual growth rate of around 100% from current levels.
Before that, however, OpenAI is going to have to tap capital markets. Goldman Sachs analysts see it borrowing and/or raising through equity sales around $75 billion next year alone. And while they note Oracle’s recent $18 billion bond sale was a success, new deals are likely to draw a sharper eye from investors.
“When equity investment comes from a supplier, we believe additional scrutiny is warranted given the ‘circular’ nature of the revenue," the bank said.
Investors don’t appear concerned when it comes to AMD. Its shares were last marked 26% higher on the session, adding around $75 billion to its overall market value. That is no surprise, given AMD has said the deal could generate $100 billion in direct and related revenue over the next four years.
The ultimate value for OpenAI may prove a bit more complicated.
Write to Martin Baccardax at martin.baccardax@barrons.com
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