AI Bubble: Circular Funding And Intense Competitive Rivalry

Core Viewpoint - The current AI capital expenditure (capex) landscape is characterized by circular funding among major companies, raising concerns about sustainability and profitability, reminiscent of past market bubbles [4][10][30]. Group 1: Circular Funding Dynamics - Major companies like AMD, Nvidia, and Oracle are engaging in circular funding, where investments are recycled among themselves, creating an illusion of unprecedented investment scale [4][7]. - This circular funding model has historical parallels, such as Cisco's vendor financing during the dot-com bubble, which ultimately led to significant market failures [4][34]. - Critics argue that the current AI funding model may not be sustainable, as many companies involved lack sufficient cash flow to support their capex commitments [11][13]. Group 2: Profitability Concerns - The majority of profits in the AI sector are currently concentrated among suppliers of AI infrastructure, such as Nvidia and Broadcom, rather than the AI companies themselves [19][30]. - Despite significant investments, AI companies have yet to generate substantial revenues, leading to skepticism about their long-term profitability [30][32]. - The high capital intensity of AI investments, combined with unclear timelines for returns, raises further doubts about the sustainability of current valuations [31][32]. Group 3: Competitive Landscape - The AI industry faces high supplier negotiating power and increasing competition, which could negatively impact profit margins [23][29]. - New entrants and substantial investments from various platforms are likely to intensify rivalry, further challenging the profitability of existing players [24][30]. - The potential for substitution among AI services remains uncertain, but it could affect buyer power and pricing dynamics in the future [25][26]. Group 4: Investment Implications - Companies in the AI sector must identify viable revenue streams to justify their massive capital expenditures, or they may face declining revenues [33]. - The stock market may struggle to sustain high valuations for AI companies, leading to potential deflation of market caps across the sector [33]. - The current investment climate, driven by high-risk funding sources, suggests that the AI bubble may be nearing its peak, with implications for broader market stability [32][33].