Artificial intelligence is causing some very concerning financial decisions. Tech giants are vying to support innovative companies, and in exchange, they are demanding implicit or explicit income guarantees. These seemingly good circles may quickly become vicious, as demonstrated by the chaotic week of upheaval at Microsoft-backed OpenAI, which owns ChatGPT.
There is a current frenzy surrounding computer programs that mimic or even exceed human capabilities. The Financial Times reports that OpenAI appears to be moving on with a proposed share sale that may value the company at over $80 billion, despite having sacked and then rehired CEO Sam Altman just days after Microsoft CEO Satya Nadella intervened. A deal would indicate, in part as a result of the corporate buttresses, that the hype is robust enough to overcome the serious concerns now revealed. OpenAI had to halt ChatGPT Plus subscriptions prior to the boardroom coup because it was unable to handle the influx of new customers. In many ways, this degree of excitement is reminiscent of the dot-com era.
The OpenAI mania was partially ignited by Microsoft's $10 billion investment in January. The ChatGPT operator committed to using the cloud computing capabilities of its new investor only as part of their agreement. The Information, a tech news outlet, reported that OpenAI had spent less than $1 million with the software giant in the 12 months before their agreement, and now that amount is expected to surpass $400 million annually on Microsoft Azure alone.
Silicon Valley has seen a surge in the usage of "generative AI," which employs algorithms to create fresh text or images based on training data. Microsoft, Alphabet, and Apple are among the notable companies that have outperformed the Nasdaq Composite Index this year. Excitement is understandable to some extent, but, as was the case in the 1990s when extending communications networks around the world became fashionable, there is a noticeable risk associated with the way the investments are being arranged. Both generate fresh demand for current products while simultaneously accelerating innovative ideas. But laws or other issues might easily impede development or add further barriers to the use of AI, endangering all the additional money Big Tech is expecting and driving up their skyrocketing valuations.
With its most recent funding round, OpenAI's value could surpass the $30 billion estimated earlier this year. There has been mutual elevation. According to LSEG, Microsoft's current market value, including debt, is over $2.8 trillion, which is more than ten times the revenue analysts predict for the upcoming year.
AI initiatives will improve other top lines at a level commensurate with the capital being poured into them. Amazon, for instance, disclosed plans in September to invest up to $4 billion in Anthropic, which has committed to investing the same amount in Amazon's cloud computing offerings over the following five years. Following Amazon's deal, Google made a $2 billion further investment in the same business in addition to over $3 billion months earlier.
This is reminiscent of the bubble long ago. Then, in order to lay communications wires across ocean floors and beyond, both newcomers and more established businesses borrowed over $1 trillion. Cisco Systems, Nortel Technologies, and Lucent Technologies were among the equipment vendors that had rapid top-line growth and valuation increases. The income supporting the boom wasn't as reliable as it seemed, which was the issue.
Another issue was vendor financing, which was legal but misdirected. Manufacturers of telecom equipment provided credit to startups so that they could purchase the necessary equipment. The reasoning behind this was that businesses such as Nortel could make valuable use of their balance sheets. In order to offset the risk, users would pay higher rates of interest and be forced to use the switches and other devices made available by a specific supplier. Competitors who didn't lend will have a risk of falling behind in a market where the size matters.
There was a double whammy when the bubble broke. Equipment sales soured, resulting in defaults and damaging balance sheets. Additionally, there were no more orders, which produced unforeseenly high losses. Over the course of a decade, the market value of network gear makers fell by over 90%.
That raises a question about whether vendor equity poses a threat like a repeated history. Obsessions with investing come with the risk that they will only get worse with time. For instance, vendor financing in the telecom industry grew quickly until it collapsed. While cynics knew even bad deals would raise stock prices, optimists worried about missing a rare opportunity. This means that as this tech craze gains traction, it will be important to watch the extent to which tech incumbents and independent AI projects support one another.