Something Ominous Is Happening in the AI Economy
3 days ago
- #Financial Risk
- #Tech Investments
- #AI Economy
- CoreWeave, a former crypto-mining firm turned data-center operator, has become a major player in the AI economy despite having zero profits and billions in debt.
- CoreWeave's business model involves buying high-end computer chips and leasing data centers to AI companies, generating $5 billion in revenue but spending $20 billion, with $14 billion in debt and $34 billion in lease payments due soon.
- The company's revenue heavily depends on a few clients, including Microsoft (70%), Nvidia, and OpenAI, creating a complex web of financial interdependence.
- The AI sector is experiencing extreme financialization, with tech giants like Amazon, Google, Meta, Microsoft, and Oracle making massive investments in data centers and taking on huge debts.
- Nvidia is central to the AI boom, striking deals where AI companies pay with equity, effectively tying future profits to chip purchases.
- OpenAI has committed to purchasing hundreds of billions in computing power from providers like Oracle, Amazon, and CoreWeave, while also investing in smaller AI startups.
- The AI industry is making high-risk bets, with companies like OpenAI projected to lose $15 billion this year and not expecting profitability until at least 2029.
- Financial arrangements in the AI sector, such as special-purpose vehicles (SPVs) and GPU-backed loans, resemble those seen before the 2008 financial crisis, raising concerns about systemic risk.
- Private-equity firms are heavily involved in lending to the tech sector, with $450 billion in private credit already extended and another $800 billion expected in the next two years.
- The lack of transparency in private credit and its growing ties to banks and insurers could amplify the impact of an AI sector crash, potentially leading to a broader financial crisis.
- The federal government, under the Trump administration, is loosening regulations, allowing 401(k) holders to invest in private credit, potentially exposing more of the public to financial risks.