A key red flag in the AI sector is circular financing, where a company like NVIDIA invests in a startup that then uses the funds to purchase NVIDIA's products. This creates a closed loop that can artificially inflate revenue and demand metrics, a tactic reminiscent of the dot-com bubble.

Major cloud providers like Amazon are making multi-billion dollar investments in AI startups like Anthropic, which then commit to spending that money back on the provider's cloud services. This "circular" financial arrangement locks in future revenue and inflates growth metrics with non-organic activity.

A massive portion of cloud providers' growth comes from just two AI companies, OpenAI and Anthropic. Since these same providers (e.g., Microsoft, Google) are also major investors in those startups, it creates a circular economy where investment capital flows directly back as revenue for compute.

It's increasingly difficult to gauge the true profitability of cloud businesses due to circular investments. Tech giants invest in AI startups, which then use that capital (often in the form of cloud credits or vouchers) to pay for compute on the investor's platform, inflating reported revenue growth without a corresponding cash transaction.

The AI ecosystem appears to have circular cash flows. For example, Microsoft invests billions in OpenAI, which then uses that money to pay Microsoft for compute services. This creates revenue for Microsoft while funding OpenAI, but it raises investor concerns about how much organic, external demand truly exists for these costly services.

Major cloud providers invest billions in AI labs like Anthropic and OpenAI, who then commit to spending those billions back on the providers' cloud services. This circular flow significantly inflates revenue backlogs, raising questions about whether the growth is sustainable or symptomatic of an AI bubble.

Companies like NVIDIA invest billions in AI startups (e.g., OpenAI) with the understanding the money will be spent on their chips. This "round tripping" creates massive, artificial market cap growth but is incredibly fragile and reminiscent of the dot-com bubble's accounting tricks.

The memo flags deals where money is "round-tripped" between AI players—for example, a chipmaker investing in a startup that then uses the funds to buy its chips. This practice, reminiscent of the 1990s telecom bust, can create illusory profits and exaggerate progress, signaling that the market is overheating.

Explosive growth in cloud divisions (e.g., Google Cloud's 63%) may be artificially inflated. A significant portion of this revenue comes from AI startups spending the venture capital they raised—often from the cloud providers' own venture arms—on cloud credits, creating a circular funding loop.