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Welcome back to the rundown for another weekend deep dive. Today we are talking about Nvidia and how they've become the puppet master of the AI economy. Nvidia has been the biggest beneficiary of the AI boom. But now Nvidia is going from selling shovels in a gold rush to investing in the gold mine themselves. And that's starting to raise concerns of circular accounting. Nvidia has recently announced investments in companies like Core Weave and OpenAI. So in today's episode, we're going to take a closer look at these investments by Nvidia, why they're doing them in the first place, and why investors are starting to get nervous. We got a great one for you today. Let's dive in. To understand Nvidia's web of influence, we need to start with Core Weave. Core Weave is like a landlord for AI chips. Their entire business model is buying up tens of thousands of Nvidia's AI chips, putting them in an AI data center, and then renting out the computing power of that data center to companies like Microsoft and OpenAI. And they're not the only ones doing this. All right, there's a company called Nibius that's doing it. There's also Lambda, and these companies have been referred to as Neo Clouds. Now, what makes Core Weave interesting is that Nvidia was actually an early investor in the company. You know, as of today, Nvidia has about a 7% stake in the company. And the two sides just expanded their partnership with a $6.3 billion deal. This deal essentially guarantees that Nvidia will buy any of CoreWeaves unsold cloud capacity through 2032. It's a very interesting deal, and it essentially serves as a massive safety net for Core Weaves entire business. If AI ever has a slowdown and Core Weave has trouble selling their cloud capacity, Nvidia will be right there buying it up. So when that deal was announced, it raised some eyebrows because again, Core Weave is a big buyer of Nvidia's chips. So that investment that Nvidia made in Core Weave will likely just come back to Nvidia because Core Weave will use that money to buy Nvidia's chips. But this latest deal by Nvidia is the one that sent shockwaves through the industry. On Monday of this past week, Nvidia announced that it's investing up to $100 billion in into OpenAI, the maker of ChatGPT. And OpenAI plans to use that money from Nvidia to build out their data centers. And power them with Nvidia's chips. OpenAI says they ultimately want to build out 10 gigawatts of AI data centers, which will require millions of Nvidia GPUs. Now, this deal between Nvidia and OpenAI is still in the early stages. In fact, they've only signed a letter of intent. But the way it's expected to work is that Nvidia will invest 10, $10 billion chunks as each new gigawatt of capacity is built by OpenAI. And what this deal does is that it locks in OpenAI as a massive long term customer and it gives Nvidia a direct stake in the world's leading AI company. You know, on the surface, it seems like a win win, but it's another case of Nvidia giving a company money just to see that money come back to them. Now, if those deals weren't enough, Nvidia also announced a $5 billion investment into intel, which one of their oldest rivals. Now, this partnership between Nvidia and Intel seems to be more politically driven. It's a way for Nvidia to participate in Intel's comeback, which the Trump administration really wants to happen. And one day, maybe it will lead to intel potentially manufacturing Nvidia's chips instead of Nvidia's current manufacturer, TSMC, which is based in Taiwan. But why is Nvidia investing so much money, not just to prop up their customers, but also their rivals? Well, it's because they have so much money that they don't know what to do with it. Now, this is probably not hard to believe, but Nvidia has built up a huge cash pile over the last couple of years. Just three years ago, Nvidia was generating about $6 billion in annual free cash flow. But this fiscal year, Nvidia is expected to bring in about $97 billion in free cash flow. That's second only to Apple amongst all the mega cap tech companies. So Nvidia just has so much money, thanks to all the demand for their AI chips and that they don't really know what to do with it. Now they are looking out for shareholders and using that cash for share buybacks. The company has repurchased nearly $50 billion of their own stock over the past year and recently upped its share repurchase plan by another $60 billion. But again, they're making $100 billion a year in cash. So they're using that cash pile now to invest in other AI companies. Nvidia has participated in 41 different VC deals in 2024 and, and they've already made more than 50 deals this year so far. Their investments include everything from a cloud company in the UK to a self driving car startup. The one thing that these investments have in common is that they're all AI companies and will likely be spending money on buying Nvidia's chips. Or they might use the money to rent cloud computing capacity from core we which Nvidia is an investor in. One way or another, these AI companies are going to be spending money that's going to end up going back to Nvidia. And that brings us to the most controversial part of the story, the accusation of circular financing. All right, so let's talk about the circular financing issue, because that's the word being thrown around a lot when it comes to Nvidia these days. Let's first define what circular financing is. Circular financing is when a dominant company invests money into its customers who then turn around and use that exact same money to buy the company's products. An example of circular financing would be like if Ford invested $10 million into a taxi company. But as part of that investment, the taxi company had to buy $10 million worth of Ford cars. In that example, the money just made a round trip. It went from cash on Ford's balance sheet to showing up as revenue for Ford. And that's kind of what's going on with these Nvidia deals. You know, Nvidia is investing $100 billion into OpenAI, which OpenAI is then going to use to buy Nvidia's chips to put in their data centers. Nvidia has said that AI will not be used for any direct purchases of Nvidia's products. But I mean, come on, a lot of that money is going to be coming back to Nvidia because OpenAI is going to have to buy their chips. Now Nvidia bulls will make the case that this is just genius financial engineering by Nvidia. They're using all the money they have by nurturing the AI ecosystem to ensure that it continues to grow and that their partners have the capital to keep growing. And as far as Nvidia's specific investment into OpenAI, this might unlock even more financing opportunities for OpenAI to raise more money. You know, I really like this analog on Bloomberg where it said that it's like having your parents co sign on your first mortgage. Now that investors see that Nvidia is back in OpenAI, they might be more willing to invest in OpenAI themselves. My counter to that would be like, I don't think OpenAI had any problems getting investors in the first place, but I could see their point. The bigger concern here though from critics is that this is a sign of bubble like behavior and it has investors asking the question if Nvidia's growth moving forward will be real or is it just propped up with their own cash? The spending on AI that we're seeing today is starting to feel like a lot of other historic bubbles. The two that are most talked about are the railroad boom of the 1800s and the telecom boom of the late 90s. In both those cases there was an insane amount of money spent on building infrastructure. But the companies ended up building too much too fast and they outran actual demand, which caused a massive crash. Now eventually all the railroad and the fiber cables that were built got used, but a ton of companies still went bankrupt in the process. And that's the big concern right now with AI. The entire market seems to be propped up by AI. Since Chad GPT was launched in November of 2022, AI related stocks have driven 75% of the S&P 500 returns. AI has also accounted for 80% of earnings growth and 90% of capex spending, according to JP Morgan. And there seems to be no signs of slowing down when it comes to capex spending. Big tech companies are planning to spend over 300 billion in AI related capex this year and that number is expected to go up next year. And the economy is now addicted to this spending. For the past two quarters, AI capex has actually added more to US GDP growth than consumer spending. And here's another crazy stat. Construction spending on data centers has now eclipsed construction spending for corporate offices. And the problem here is that for some of these tech giants, capex spending is now growing faster than their cash flow. And some of these massive AI deals are being signed with what you would call future money. OpenAI's huge contract with Oracle, for example, was signed before OpenAI even had the committed capital to pay for it. And this gap between spending and earning is only going to get wider. According to the consulting firm Bain & Co. They predict by 2030, AI companies will need a combined $2 trillion in annual revenue to just to fund their computing power. The problem is that their revenue is likely to fall short by $800 billion. That means that more and more of this AI build out will have to be funded by debt and not cash flow. And when you get debt involved, that's when things can get out of hand and lead to big crashes, not just for the tech sector. But potentially for the entire financial system. So what's my take here? Well, I think we've gotten to the point in the AI cycle where people are actively looking for reasons to be bearish. And Nvidia's multibillion dollar investments into other AI companies are the latest red flag. On one hand, I have to admire Nvidia strategy. They're sitting on a mountain of cash and they're using it to grow the entire AI ecosystem. But on the other hand, it absolutely increases the concerns of a self fueling bubble. Now, you know, at this point, Nvidia has woven itself so deeply into the fabric of, of the AI economy that they're not just a supplier anymore. People refer to Nvidia as selling shovels in the AI gold rush. They're not just selling shovels anymore. They're now bankrolling the miners, building the gold mine towns and taking a cut of all the gold that comes out of the ground. But, but then what happens? If the demand for AI dries up, that could cause the entire AI house of cards to come tumbling down. Now personally, I don't think the AI crash will be as bad as the dot com crash, but man, every headline that comes out each week makes me a bit more nervous. Well, all right guys, that's it for today's weekend deep dive. Thank you guys so much for spending a part of your weekend listening to the show. If you guys have enjoyed our episode so far, consider giving us a five star rating on Apple, Spotify or wherever you listen to your podcasts. And if you are listening on Spotify, we're trying to cross 6,000 five star ratings before the end of the month. I think we're less than 100 away and if it does end up happening, we're going to do some sort of merch giveaway. So if you haven't already, go on Spotify and help us get over the top. And while you're at it, consider leaving us a comment on Spotify or YouTube. Let us know what you think about these Nvidia investments. If you think that they're shady or if you think that they're just a genius move by Nvidia. You know, all that engagement really does help us out and it helps other people find the show. Thank you guys so much for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow for the interview bundle.