← Prof G Markets
Prof G Markets
$100B Nvidia-OpenAI Deal: Growth or Financial Engineering? & Oura Ring’s $11B Valuation
00:28:06
Loading summary
Transcript24 lines
- [00:01]
Sponsor/Ad Reader
Support for the show comes from Anthropic, the team behind Claude. When you're analyzing market trends or trying to understand what's really driving economic shifts, you need more than surface level takes. Meet Claude, the AI thinking partner that works through complexity with you. Whether you're dissecting earnings reports or exploring the ripple effect of policy changes, Claude helps you dig deeper into the analysis that matters. Try Cloud for free at Claude AI ProPGMarkets and see why the world's best, best problem solvers choose Claude as their thinking partner.
- [00:33]
Gil Luria
AI agents are getting pretty impressive. You might not even realize you're listening to one right now. We work 247 to resolve customer inquiries. No hold music, no canned answers, no frustration. Visit Sierra AI to learn more. Avoiding your unfinished home projects because you're not sure where to start. Thumbtack knows homes, so you don't have to don't know the difference between matte, paint, finish and satin or what that clunking sound from your dryer is. With Thumbtack, you don't have to be a home pro, you just have to hire one. You can hire top rated pros, see price estimates and read reviews all on the app.
- [01:12]
Ed Elson
Download today today's number 47,000. That's how many gun deaths occurred in America last year, roughly seven times more than all of Europe put together. The more important number, however, is five. That's how many trans people participated in women's sports.
- [01:33]
Gil Luria
Money markets matter. If money is evil, then that building is hell.
- [01:37]
Ed Elson
Show goes on. Welcome to Prof. G Markets. I'm Ed elson. It is September 24th. Let's check in on yesterday's market vitals. The major indices fell after Jerome Powell gave a speech that offered no hints at a rate cut in October. The Nasdaq dropped 1%, with tech leading the declines. More on that in a minute. Gold hit its 36th record high of the year. And finally, Paramount shares climbed as much as 8% to a 52 week high. The rally followed reports that a top antitrust official from Trump's first term is in talks to join the company. The market appears to be taking this news as a bullish signal for David Ellison's pursuit of Warner Brothers discovery. Okay, what else is happening? Nvidia is making a massive $100 billion investment in OpenAI. It is the largest AI infrastructure project in history. The money will be used to build data centers with more than 10 gigawatts of capacity, all equipped with with Nvidia chips. Nvidia will receive equity in OpenAI as part of the transaction. It also stands to make between 350 and $500 billion in revenue over the lifetime of this deal. Meanwhile, OpenAI will gain the platform and compute needed to train its next generation models. The news pushed Nvidia shares to a record high on Monday and sparked a broader AI rally. But the stock slipped 3% yesterday, dragging the rest of tech down with it, as investors gave the deal a second look. So to help us break down this deal and what it means for the AI ecosystem and why the markets are reacting to this deal the way they are, we have Gil Luria, head of Technology Research at DA Davidson. Gil, thank you very much for joining us again on Profit Markets.
- [03:37]
Gil Luria
Thanks for having me.
- [03:38]
Ed Elson
So Nvidia is investing $100 billion into OpenAI. What do we know about this deal and what were your initial reactions to the deal?
- [03:48]
Gil Luria
Well, what we know is that OpenAI is making very large commitments all over the place and it doesn't really have the capital to back those up. And it got to a point where Nvidia needed to step in, so at least OpenAI can move forward. That's how I see the fact pattern right now. Now, from an Nvidia perspective, of course, if they can stimulate demand in the market, they have the capital. Why wouldn't they? From an OpenAI perspective, I think we need to start being cautious about promises OpenAI is making all over the place without being able to really have the capital to fulfill those promises. So just to start right, Microsoft has right of first refusal on OpenAI compute. So if Microsoft wanted to, they can do all of it. On top of that, OpenAI just committed 300 billion, at least $300 billion to Oracle. And then OpenAI had a release a couple of weeks ago, but then another $100 billion for backup. And then on top of that, they have $25 billion commitment to core Weave. And then they're trying to develop their own hardware with Johnny I, and then they're trying to develop their own chips. And oh, by the way, they're going to lose more than $10 billion on $12 billion worth of revenue this year. So those are a lot of commitments they're making. They don't have the capital to fulfill those commitments. They asked for capital. And what's a little concerning is that the only investor that raised their hand was Nvidia, the one selling all the chips into the ecosystem.
- [05:21]
Ed Elson
One of the strange things about this deal though, at the same time is you've got Nvidia, yes, saying they're going to invest 100 billion into OpenAI. But then we also learned that OpenAI is going to buy, I think, 10 gigawatts of AI capacity. And according to Jensen Huang, a gigawatt of AI capacity costs about $50 billion. So the next question that I'm asking is like, does that mean OpenAI is about to pay Nvidia $500 billion to get their chips? I mean, does OpenAI even have that? And is that actually what is going to happen here?
- [06:01]
Gil Luria
Well, I can think we can start saying that none of this is going to actually happen. The assumption behind this is that OpenAI can take the $100 billion from Nvidia and borrow another 400 billion from the capital markets. And that's where this really starts getting fantastical because that's their plan. That's Oracle's plan, that's coreweave's plan. In fact, Meta has talked about borrowing to build data centers. Elon's talked about borrowing to borrowing to build data centers. At some point they're going to be tapping the entire below investment grade debt market in order to build out data centers. Some of them may get some capital to do that. Not everybody's going to get all the capital they want. And that's how this is going to start playing out. And again, Nvidia is fine. They've made it into chunks. They'll give OpenAI 10 billion at a time. OpenAI may or may not get leverage. Either way, they're going to turn around and either they'll buy chips or Oracle will buy chips to serve them or some other combination. But to get to those big numbers, we never will just because they're fantastical. And again, there's double, triple, quadruple booking from OpenAI being done. Not all that's going to transpire. That doesn't mean OpenAI is going to fail. As long as we're using ChatGPT, as long as companies are using their API, they'll be fine. There's going to be someone who wants to pay for them to exist and to grow. Just not at this magnitude. This magnitude doesn't make sense.
- [07:30]
Ed Elson
What about the investment by Nvidia itself? One thing that was notable to me at least, is that the announcement from Nvidia was a plan to invest $100 billion. It wasn't, to my knowledge. There's no signed deal terms here. Do we know if anything has actually been signed? Or is this again more of a promise about the future?
- [07:53]
Gil Luria
Yeah, the reporting is that this was just happened over the last couple of days, so I doubt there's A comprehensive contract signed for $100 billion. Yeah, that's unlikely. But again, Jensen wants to make sure everybody knows he's behind OpenAI. He's going to be supportive of their growth because there have been some doubts. Again, their commitment of $300 billion to Oracle got everybody all excited until everybody stepped back and said, well, they clearly don't have the $300 billion that got people worried. Jensen doesn't want that. So he backstopped it with this commitment. That's what's happening and he doesn't need to do it. He has organic customers and Microsoft and Amazon and Google and Meta and xai. He can just sell to them. He wants to expand the market. He doesn't want to be beholden to a small number of customers, so he's seeding demand that way. And again, OpenAI is a critical player for progress here, so he wants to make sure there's at least a sense that there's some backstop. But I doubt there's a signed contract.
- [08:51]
Ed Elson
What does this mean for the rest of the AI economy? If the largest player in the consumer AI economy, OpenAI ChatGPT, if that entity is, as you say, going around and making most likely false promises. I mean, I don't think it's that out there of you to say that this stuff isn't going to happen. I think a lot of people would probably agree with you. I agree with you. If the largest player in AI is doing this, what does this mean for the rest of the AI economy? What does it mean for all of the AI stocks in which many Americans have basically invested their 401ks? I mean, we're all invested in AI at this point. What does this mean for us?
- [09:39]
Gil Luria
Well, it's very important to isolate the real participants that are making money will continue to make money from all the expanded AI trade stocks. Right. So the companies that will make money one way or another, Nvidia, they're Microsoft. Meta's making money because it makes their ads better. Amazon and Google are providing access. And then let's not forget that the other AI winners, the best models, are from Google, they're from xai, they're from Anthropic, which is funded by Amazon in a much more responsible way. They're not going away. OpenAI may be trying to crowd them out. That's not going to work. AI will move forward with or without OpenAI. Again, I'm not saying that OpenAI won't move forward. It's just the types of steps they're making right now are really detracting from their credibility and again are causing the speculative interest in these marginal AI players. Your oracles, your core weaves. IonQ is going up every day. This is the stuff we need to be weary of. These are companies that are value destroying. Again, we talked about, and we've talked about in the past, that then Core weave borrows at 10% and gets a 5% return. That's like buying Treasuries on margin. That's value destructive and yet the stock goes up every day. We need to stay away from those marginal players and focus on the companies that are great companies are building AI that we will use, that are already making money there. And in fact as we sit here today are the least expensive stocks in the AI trade. Nvidia and Microsoft are trading at a lower multiple than Oracle. They're certainly trading at a lower multiple than Core Weave because infinity is a very high multiple because they'll never make money. And so I would focus investors on those companies that are already making money on AI will continue to do so.
- [11:37]
Ed Elson
You mentioned the Amazon anthropic relationship there, which you say is more responsible, more responsible. Agreement, funding, contract. I mean when we look at what else is happening in AI, you've got, yes, you've got Nvidia and they have this almost this vendor financing deal with OpenAI where they invest in OpenAI and then OpenAI goes back and spends that investment on the chips. But it's not just Nvidia. We see it again. We do see it with Amazon anthropic. Amazon invests in anthropic, Anthropic rents the compute. We see it with Microsoft and OpenAI, we're seeing this a lot. Nvidia and Core Weave, this, this almost circular deal theory where you invest in a company and the company turns around and spends money on your product. That to me has financial engineering esque traits. Some would call it pyramid scheme esque. We're getting maybe a little bit doomer, but at the very least it is circular. I wonder if that concerns you at all. Again, from the perspective of AI at large.
- [12:49]
Gil Luria
Very much so, very much so. Because you'd much rather investors be investors, customers be customers, and not to mix all this up and not create artificial demand, which is what that is. When you're doing financial engineering, you're creating artificial demand. What I would argue is we don't need to make artificial demand. AI is incredibly helpful. We're using it every day, everybody's using it. The model keep getting better and better and every time the models get Better, that unlocks a whole set of applications that are being done. The organic growth that we need for compute is real. All that's real. The financial engineering that's happening isn't helpful. It's increasing demand, but artificially. So if we just focused on the real increase in demand and again, there are companies that we can invest in for that, I'll go back to the Microsoft, Amazon, the Google. As long as we focus on those, we'll be fine. If we start believing the financial engineering and believing that Oracle's value needs to go up by $400 billion because OpenAI promised them $300 billion, that doesn't make any sense. The margins on those $300 billion would be low anyway. And by the way, again, it's not going to materialize. So that's where we need to be careful. The places where the financial engineering are happening are not real demand.
- [14:17]
Ed Elson
It's really critical insights that you have here on OpenAI. And if, as you say, that none of this goes through, none of this materializes, I wonder what this will do to OpenAI as a company and as a brand. Do you have any predictions for us on how this will affect OpenAI moving forward? What does this mean for OpenAI and perhaps why is the CFO or maybe Sam Altman pursuing this strategy of making all of these promises?
- [14:49]
Gil Luria
Because they're fundraising, because they're out there trying to raise capital and that's why they need to make the big promises and make it seem like OpenAI is the only game in town. There's a couple of scenarios. One is that OpenAI scaled down its ambitions at some point. ChatGPT is growing fantastically. If it just continues to focus on that, focus on just getting the computer needs to ramp up ChatGPT, it will be fine and it may even still be the leader. But if they overextend themselves and make a lot of promises they can't keep, borrow money to do it, have other people borrow money to do it, it will end badly. Now, I will still move forward because Google and Meta and Xai, an anthropic, will move it forward. And by the way, the Chinese companies will move it forward. But OpenAI itself, if it doesn't scale down its ambitions to a reasonable way, that won't make it come to a head. It may be like MySpace, like Yahoo, and maybe the first, but not the one that ends up being successful.
- [15:56]
Ed Elson
Fascinating. Gil Luria, head of technology research at DA Davidson. We really appreciate your time. Thank you. That was Gil Luria, head of technology research at DA Davidson. So a precarious investment strategy is emerging in the world of AI, something we are calling the circular deal theory. And we've just seen it here with this OpenAI investment. Nvidia invests in OpenAI and then OpenAI turns around and spends that investment on Nvidia chips. The cash goes out the door as investment and it comes right back in as sales. It is a perfect circle. You fund your customer and you also guarantee your demand. Now, the fact that it has happened here is already a little bit concerning, but what is more concerning is the fact that this is becoming actually commonplace in AI. It's not just Nvidia. Everyone is doing this. Take Microsoft for example, which invests $13 billion in OpenAI and then OpenAI turns around and buys $10 billion in compute from Microsoft. Or Amazon, as we mentioned, which invests 8 billion in anthropic. And then anthropic turns around and they buy Amazon's Compute or Google, which invests in anthropic. Anthropic turns around, buys Google's Compute or Nvidia investing in Coreweave or Oracle investing in OpenAI, Stargate. On and on and on, the list goes on. They're pitched as investments, but then you do a little bit of digging and you realize, hold on, all of this money's going in the same direction. It's all going in a circle. And meanwhile, the circle is also rotating around the same small handful of players. Google, OpenAI, Microsoft, Nvidia, etc. You deploy the capital, you collect the revenue, you watch the stock go up. But ultimately the money never actually leaves the circle. Now, what will this mean for AI? What will it mean for the AI economy? Well, we're not exactly sure. We can't predict the future. But we have seen this movie before. We saw it in the dot com era, we've seen it many times before. Everything is fine, everything's great when the music is playing. And right now it's clear the music is playing. But as soon as it stops, as soon as the narrative runs out, what we know is that things can very quickly get very ugly. After the break, a look at the most valuable wearable tech company in the world. If you're enjoying the show, give profit you markets a follow.
- [18:51]
Sponsor/Ad Reader
Support for the show comes from Grunds. An apple a day keeps the doctor away. Yada yada yada. The truth is that even if you enjoy fruits and vegetables, it can still be tedious to get all the nutrients your body needs. So here's a tip. Add grunds to the mix. Grunds isn't a multivitamin, a green skimmy or a prebiotic. It's all of those things. Things and then some at a fraction of the price. And bonus, it tastes great. All Gruyn's daily gummy snack packs are vegan, nut, gluten, dairy free with no artificial flavors or colors and they're packed with more than 20 vitamins and minerals with more than 60 nutrient dense ingredients and whole foods. And for a limited time you can try their Gruni Smith apple flavor just in time for fall. It's got the same snackable, packable full body benefits you've come to expect, but this time these taste like you're walking through an apple orchard in a cable knit sweater. Warm apple cider in hand, grab your limited edition Gruny Smithapple Gruns, available only through October. Stock up because they will sell out. Get up to 52% off when you go to Gruns Co and use the code Markets Support for the show comes from Anthropic, the team behind Claude. When analyzing complex market movements or policy implications, the difference between surface level commentary and real insight comes down to asking better questions about the data. Cloud is for AI for minds that don't stop at good enough. It's a collaborator that actually understands your entire workflow and thinks with you, not for you. Whether you're strategizing your next business move or diving deep into economic analysis, Cloud extends your thinking to tackle the problems that matter for finance provides professionals exploring earnings reports or economic policy ripple effects. Cloud works through complexity rather than rushing to conclusions. It helps spot connections across multiple sources, challenge assumptions, and develop insights that go beyond the obvious. Try Cloud for free at Claude AI Property Markets and see why the world's best problem solvers choose Claude as their thinking partner.
- [20:50]
Gil Luria
Does it ever feel like you're a marketing professional just speaking into the void? But with LinkedIn ads, you can know you're reaching the right decision makers, a network of 130 million of them. In fact, you can even target buyers by job title, industry, company, seniority, skills and Did I say job title? See how you can avoid the void and reach the right buyers with LinkedIn ads. Spend $250 on your first campaign and get a free $250 credit for the next one. Get started@LinkedIn.com campaign terms and conditions. Conditions apply.
- [21:23]
Ed Elson
We're back with Prof. G Markets. The maker of the Oura Ring, a health wearable that tracks your sleep, health and fitness Data, is raising $875 million in a new round that values the company at $11 billion. That is double its valuation from last November. It also makes Aura the world's most valuable standalone wearables company. And it is a standout player in the ever growing $2 trillion wellness industry. Now, why do we care about this? Well, we've discussed the wearables industry on the show many times before. We've specifically discussed what a bad business it is. I mean, we've seen the Google Glass, which crashed and burned. We've seen Jawbone, the fitness tracker that raised billions before it went bankrupt. We've seen the Humane AI pin, which sold only about 10,000 units, and then it shut down. We've seen Magic Leap. We've seen the Meta Quest. We've seen the Apple Vision Pro, all of the wearable headsets that flopped over the years and that Scott used to call the world's greatest prophylactics. In sum, wearables is an incredibly difficult business. It usually doesn't work. However, Oura and the Oura ring has cracked it. They've sold five and a half million rings. Three million of those were sold in the past 15 months. They're on track for a billion dollars in revenue, up 100% from last year. A fifth of that number is coming from subscription revenue. Aura has created an extremely solid business in wearables. So we just wanted to take a moment here to discuss how. What did Aura do differently? How did they succeed in this notoriously difficult industry? Well, here are a few observations that we had. Number one is design. Simply put, the Oura ring looks good, and this was years in the making. In fact, Oura actually teamed up with Gucci to design something that people actually want to wear. They also partnered with aspirational brands like Equinox and Lululemon. They formed partnerships with health and fitness influencers. Eventually, celebrities were wearing it. Kim Kardashian, Ronaldo, even Prince Harry. And this is the first and the most important rule of wearables, and that is no one will wear something on their body that looks lame. It has to look, at the very least, a little bit cool. And Aura solved for that through smart design and sophisticated intentional branding. They built a product. They built a wearable that wasn't embarrassing to wear. Now, the second thing that they got right is focus. If you're going to put a product on your body, if you're going to wear it, which is a very personal thing, well, then you have to have a reason for wearing it. And the reason needs to be specific. You look at the Google Glass The Vision Pro, the humane AI Pin. All of these wearables might have had some very interesting and sophisticated technology, but none of them answered the question of what is the point? Why am I wearing this? Is it for entertainment? Is it for work? What is the purpose of this? Well, Aura answered that question. It tracks your health and it tracks your sleep. That's the point of wearing it. And they emphasized this from the very beginning. And they invested heavily in becoming the best in class wearable for biometric health. In fact, shortly after launching, the Stanford Research Institute released a study without informing Aura that praised the ring as the most accurate wearable for measuring sleep quality. They've been featured in more than 100 peer reviewed studies. They've secured integrations with over 600 health brands. One of the most successful pairings was with Natural Cycles, which is a birth control app. Now, women are one of Aura's fastest growing customer bases. Biometric health is at the center of everything they do. The product is focused, and the value proposition of wearing this thing is a lot more clear than most of the other wearables that we've seen in the past. Now, the third and final reason that we think Aura has been so successful is pricing. The oura ring costs $300. And you know, that's not nothing. But in the world of biohacking, a market that is really built for the ultra wealthy, Aura is one of the most affordable ways to participate. You look at cold plungers, which are all the rage right now. A home cold plunge will cost you around $5,000. An infrared sauna will cost you around $9,000. The King of biohacking, Brian Johnson, his routine cost him $2 million per year. So this practice of longevity, of biohacking, this has become a routine of the very wealthy and the ultra wealthy. However, Aura has opened it up to the wealthy, the regular wealthy. And this is a crucial aspect of the product and its success. Unlike most longevity products and most wearables for that matter, the pricing actually makes. So those are our observations on the Oura ring and why it didn't flop like most of these other wearables. Design, focus, pricing. We should also give a shout out to Whoop. That is the other wearable that is actually working. And we believe that Whoop checks all of those boxes too. Now, one final note before we wrap up here. You might be thinking this company's kind of interesting. I would like to invest in this company. And that would be a fair instinct. The company just raised its Series E round. It's valued at $11 billion. It's about time to go public. However, we again return to that same problem we keep running into, and that is you might not be able to invest. When asked about a potential ipo, the CEO Tom Hale said, aura isn't going public. Why? Well, because he said, there are, quote, real advantages to being a private company. So yet again, we are seeing how the private markets and the public markets are converging. The private markets are flush with cash. The public markets are less and less attractive. And the result is yet another great company with great technology that regular investors cannot buy. Okay, that's it for today. This episode was produced by Claire Miller, edited by Joel Patterson and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our research team is Dan Shalon, Isabella Kinsel, Kristen o' Donoghue and Mia Silverio. And our technical director is Drew Burrows. Thank you for listening to Prof. G Markets from Profg Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow. In Prime Big Deal Days. Estesiete yocha de octobre aprovicha grande sofertas.
- [28:39]
Gil Luria
In unuevo spade PS Te transformara in.
- [28:41]
Ed Elson
La reina de la relacion. Espera Tina porcientomenos in pram Big deal days.