The Circular File
Advanced Micro Devices recently announced a deal to sell a ton of computing power to OpenAI over several years. To sweeten the deal (and to even make the deal possible), AMD issued warrants that will enable OpenAI to purchase up to ten percent of AMD for a penny a share. In addition to some very big numbers, the deal also features the two letters investors love most these days: AI. So AMD’s stock soared on the news. And as long as the AI boom keeps growing unabated, deals like this could continue to be a win, win, win (sellers’ stock goes up, buyers get money to buy sellers’ products, and investors get to brag about their hockey stick investment gains in portfolios filled with stocks they know are really great even if they can’t quite explain what they do). Let’s add a fourth win. Because the AI economy is currently the key driver to much of what’s going well in the US economy; it’s a rising tide holding up a whole lot of boats. But let’s be clear. In the deal described above, AMD “is basically paying OpenAI to become a customer.” And transactions like this are part of a growing trend known as circular deals. “Broadly speaking, circular financing often goes something like this: One company pays money to another as part of a transaction, and then the other company turns around and buys the first company’s products or services. Without the initial transaction, the other company might not be able to make the purchase. The funding mechanism could take the form of an investment, a loan, a lease or something else.” Even Oedipus is like, “whoa, that sounds overly incestuous.” For now, it’s a virtuous circle. But, as we’ve seen in the past, virtuous circles can turn vicious in the blink of an AI. The question for investors is how to participate in the circle jerk up until the point it becomes a circular firing squad and leaves your investment portfolio circling the drain. Because, “the deals can work fine, until they don’t.” And don’t get me wrong. Circular deals aside, I hold many of these stocks in my own portfolio. What do you think I am, a total square? WSJ (Gift Article): Is the Flurry of Circular AI Deals a Win-Win—or Sign of a Bubble?
