Traders might swear there’s an “AI bubble”, but after strong earnings results from AI giant Nvidia and the well-received launch of Alphabet‘s new Gemini 3 Pro AI model, it looks like the market is only penalizing one corner of the burgeoning tech industry: the friends of ChatGPT creator OpenAI.
AI first mover OpenAI has seen its valuation soar to over $500 billion, buoyed by rapid growth and fundraising from tech giants like Microsoft, chipmaker Nvidia, hyperscaler Oracle, and Japanese bank SoftBank. OpenAI doesn’t trade as a publicly-traded company, but amid renewed AI worries, some of the big names on OpenAI’s cap table are being weighed down by the association.
While tech giants Alphabet and Apple saw their stocks rise this week, ADRs of investor SoftBank and shares of partner Oracle fell 14% and 9% respectively over the last week. And Microsoft, one of the original OpenAI investors, saw its shares fall 7% despite distancing itself from the company with a new investment in competitor Anthropic.
So what’s the deal? Well, maybe investors are starting to realize that the “press release” mill and promises of partnerships and deals that have propped up the AI market are not necessarily results.
What’s Gone Wrong?
Things arguably started to go awry when OpenAI CEO Sam Altman dismissed questions about the company’s big data center spending ambitions — over $1.4 trillion dollars in total — on a podcast hosted by investor Brad Gerstner.
In response to a question from Gerstner about how OpenAI would be able to spend $1.4 trillion while only having $13 billion in revenues, Altman said, “Enough.” He went on to explain the company’s revenue was ramping rapidly, defending the spending commitments, and awkwardly offering Gerstner an opportunity to “sell his shares” if he’s concerned.
The questions have become a staple of the “AI bubble” discussion, largely because OpenAI has not raised the money necessary to meet the commitments and will remain unprofitable for at least the next few years. And they’re not just unprofitable by a small margin: a filing from early investor Microsoft exposed that the company lost $11.5 billion in the latest reporting quarter, or about a -500% profit margin.
OpenAI says it has a plan to grow revenue and crush that loss by improving scale, reducing energy costs, and building more efficient models. But with competitive pressures mounting, those losses are proving to be a bit of a problem.
Claude creator Anthropic has been winning over coders and has profitability on the horizon, while Google parent Alphabet has learned from its innumerable missteps in AI to deliver more capable models. Both have money to spend and seem to be doing so responsibly.
And while it might be a ‘to each their own’ as to what model they prefer, OpenAI’s growth claims are running into the brick wall of slowing use, per analysis.
That’s the context for why Altman recently told employees that he was bracing for “temporary economic headwinds.” It turns out, they’ve been here for a second. What started with rising bets that key OpenAI investors like SoftBank and Oracle could default on their debt has turned into a sell-a-thon in shares of the companies, a matter only exacerbated by a Financial Times report that the latter is “already underwater” on its OpenAI deal. The two are down 40% and 35% from their recent all-time highs.
What Does It Mean?
Three straight weeks of declines in U.S. equities — largely led by tech companies — have reignited fears of a bubble in AI-focused stocks this week. However, a healthy correction might not necessarily be confirmation that an “AI bubble” is bursting, even if the appearance of cyclical deals appears sketchy at first glance.
After all, Alphabet hit an all-time high this week after launching its latest AI model. Storage companies Western Digital and Sandisk have both maintained their upswing during the recent worries. Chipmakers Broadcom and Nvidia have been little-shaken over the last month by the recent AI jitters, even despite boasting ‘aggressive’ valuations.
That’s all to say that folks can continue to swear there’s a bubble, but as AI companies continue growing — both in the public and private markets — another interpretation might be that there’s something wrong with OpenAI. And if the situation in bonds and stocks of some of their partners are any indication, it looks like some air might be coming out of the “OpenAI bubble.”
The company might not be going anywhere anytime soon, but assuming that there’s still a finite amount of money in the world, OpenAI must rely on the support of SoftBank to close its recent $30 billion round to continue funding its ambitious timeline. And further down the line, Altman can aim for a public offering for the company to help shore up the company as it seeks a profit.
But as it pursues a $1 trillion valuation, the questions of how it can afford over a trillion dollars in data center spending will continue circulating — and as recent trends prove, doubts can be contagious.
