A significant portion of AI revenue flows circularly between major players like Microsoft, OpenAI, and Oracle. To bears, this signals an unstable "house of cards." To bulls, it's a necessary bootstrapping phase underwritten by real, fast-growing external revenue. How one interprets this chart reveals their fundamental market outlook.
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The AI boom is fueled by 'club deals' where large companies invest in startups with the expectation that the funds will be spent on the investor's own products. This creates a circular, self-reinforcing valuation bubble that is highly vulnerable to collapse, as the failure of one company can trigger a cascading failure across the entire interconnected system.
Martin Shkreli reframes the critique of circular AI investments (e.g., Nvidia invests in OpenAI, which pays Oracle, which buys Nvidia chips). He argues this isn't a flaw but simply an "economy." Its legitimacy is proven not by internal transactions, but by the strong and growing demand from outside users and companies.
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.
A new AI investment model involves tech giants like Microsoft funding labs like Anthropic, which then spend more on the investors' cloud platforms. This self-referential 'circularity' is now viewed with suspicion by public markets, causing share prices to drop—a stark reversal from the initial hype that surrounded OpenAI's partnerships.
Hedge fund manager David Einhorn highlights the unstable economics of the AI supply chain, where money flows circularly with diminishing returns. For every $1 a consumer pays OpenAI, OpenAI spends $2 on Microsoft, which spends $0.60 on CoreWeave, which then spends $2.40 on NVIDIA. This questions the long-term profitability and sustainability of the entire ecosystem as currently structured.
The massive OpenAI-Oracle compute deal illustrates a novel form of financial engineering. The deal inflates Oracle's stock, enriching its chairman, who can then reinvest in OpenAI's next funding round. This creates a self-reinforcing loop that essentially manufactures capital to fund the immense infrastructure required for AGI development.
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.
The current trend of AI infrastructure providers investing in their largest customers, who then use that capital to buy their products, mirrors the risky vendor financing seen in the dot-com bubble. This creates circular capital flows and potential systemic risk.
A circular economy is forming in AI, where capital flows between major players. NVIDIA invests $100B in OpenAI, which uses the funds to buy compute from Oracle, who in turn buys GPUs from NVIDIA. This self-reinforcing loop concentrates capital and drives up valuations across the ecosystem.
The AI infrastructure boom is a potential house of cards. A single dollar of end-user revenue paid to a company like OpenAI can become $8 of "seeming revenue" as it cascades through the value chain to Microsoft, CoreWeave, and NVIDIA, supporting an unsustainable $100 of equity market value.
