A key risk emerging in the AI sector is a "circular deal theory," where major tech companies appear to be funding their own customers. For example, NVIDIA (NVDA) and Microsoft (MSFT) invest billions in companies like OpenAI, which then use that same money to buy chips and cloud services back from them. This practice turns investments directly into reported revenue, potentially inflating growth metrics for companies including NVDA, MSFT, Google (GOOGL), and Oracle (ORCL). This raises questions about the quality and sustainability of the explosive growth reported in the AI space. Investors should be cautious and question how much of a company's AI-driven revenue is from genuine market demand versus its own investment activities.

NVIDIA (NVDA)

• The podcast highlights a massive $100 billion investment in OpenAI to build a large-scale AI infrastructure project.
• This investment is a prime example of what the podcast calls "circular deal theory."
  • NVIDIA invests money into a company like OpenAI.
  • OpenAI then uses that same money to buy NVIDIA's chips for its data centers.
• This strategy allows NVIDIA to essentially fund its own customer, which guarantees demand for its products and turns an investment into immediate sales revenue.
• The podcast also notes that NVIDIA has made a similar circular investment in the company CoreWeave.

Takeaways

• Investors should be aware that a portion of NVIDIA's reported revenue from the AI sector may be coming from these "circular deals."
• While this strategy boosts short-term sales figures, the podcast presents it as a "precarious" approach that raises questions about the quality and sustainability of that revenue.
• The concern is that this growth is not purely organic. The money NVIDIA invests comes right back as sales, which could artificially inflate the company's growth metrics and stock price.

Microsoft (MSFT)

• Microsoft is mentioned as another key player in the "circular deal theory."
• The company invested $13 billion in OpenAI.
• Subsequently, OpenAI turned around and committed to buying $10 billion in cloud compute services from Microsoft.
• This is another clear example of a large tech company funding a customer who then becomes a major source of revenue for its cloud division.

Takeaways

• Similar to NVIDIA, a significant portion of Microsoft's AI-related cloud revenue may be linked to its own investment activities.
• Investors should consider how much of the growth in Microsoft's cloud division (Azure) is organic versus being funded by these circular investments.
• The podcast implies a potential risk that this growth is not based on broad market demand but rather on a closed loop of funding and spending between Microsoft and the companies it invests in.

Google (GOOGL)

• Google is also identified as participating in this investment trend.
• The company invested in the AI startup Anthropic.
• Anthropic, in turn, uses that investment to buy cloud compute services from Google.

Takeaways

• The same cautionary note applies to Google. Its AI and cloud revenue growth should be examined to understand how much is derived from companies it has invested in.
• This pattern suggests a systemic trend in the AI sector, not just an isolated strategy by one or two companies.

Oracle (ORCL)

• Oracle is briefly mentioned as another example of this practice.
• The company is noted for investing in OpenAI's "Stargate" project.
• The implication is that this investment will also circle back to Oracle in the form of sales for its cloud infrastructure or other services.

Takeaways

• Investors in Oracle should be aware of this strategy and consider its impact on reported revenue.
• The podcast frames this as a widespread practice among major tech players competing for dominance in the AI space.

Investment Theme: AI Sector & "Circular Deal Theory"

• The central theme is a potentially risky investment strategy becoming commonplace in the AI sector, which the podcast labels "circular deal theory."
• The mechanism is described as:
  1. A large tech company (like NVIDIA or Microsoft) invests capital into an AI startup (like OpenAI or Anthropic).
  2. The AI startup immediately uses that capital to buy essential products (chips, cloud compute) from the investor.
  3. The investor's cash goes out as an "investment" but comes right back in as "revenue," boosting its sales figures and stock price.
• The podcast expresses concern that "the money never actually leaves the circle," suggesting that the real economic activity and organic demand might be less than what the headline revenue numbers suggest.

Takeaways

• This is presented as a significant risk factor for the entire AI sector. The high valuations of major tech companies, driven by AI hype, may be partially built on this self-funding loop.
• Investors should be cautious and perform extra due diligence. When analyzing a company's AI-driven growth, it's important to question how much of that growth is from genuine, external customers versus from companies they have invested in.
• This trend could be creating an investment bubble in AI, where valuations are inflated by capital moving in a circle rather than by fundamental, organic business growth. The long-term sustainability of this model is questionable.