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See the diagram at the WSJ and at https://discussion.fool.com/t/ai-circular-deals/12...

The AI giants are selling huge amounts to each other but generating little in real-world profits. OpenAI isn’t publicly traded, so it doesn’t disclose financial reports. But it is known to be losing money.

https://www.wsj.com/tech/ai/is-the-flurry-of-circu...
Is the Flurry of Circular AI Deals a Win-Win—or Sign of a Bubble?
How round-trip deals could echo history and hit a wall

By Jonathan Weil, The Wall Street Journal, Oct. 22, 2025

“Circularity” has become a buzzword in artificial-intelligence deals. Some investors have drawn comparisons between the megadeals of today and some excesses of the original dot-com bubble….

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….vendor financing…

Vendor financing still exists. But it isn’t how the bulk of the latest attention-grabbing, circular deals are structured….

[snip descriptions of circular deals shown in the diagram]

Their efforts may pay off enormously if OpenAI and its competitors can ultimately generate strong cash flows to justify all the capital spending. But there also could come a point when investors grow tired of companies pouring so much capital into developing AI models and products, with little visibility into future returns….[end quote]

Considering that the growth of the S&P500 is concentrated in these very companies…and that the bubble is driven by the growth of circular deals…there is a real danger of deflation if cash flow from outside the circle doesn’t start to justify these investments.

Wendy

In a simpler time, this would have been called fraud.

In a simpler time, this would have been called fraud.

Nothing new under the sun department. Back when every utility company wanted to be Enron, there was lots of round trip trading going on. CMS Energy, here in Michigan, was round tripping with Reliance, selling blocks of energy back and forth, over and over. Management crowed about how revenues were soaring. Don't look at the stagnant profits, management said "look at the growth in revenue". Broadband network operators were selling IRUs back and forth: each carrier buys capacity on the other's network. Each books the sale as current revenue, but capitalizes the cost of the purchases so it is depreciated over a number of years, they management points a finger at the soaring profits.

Steve....Ponzies R us

<In a simpler time, this would have been called fraud. >

No, it's not fraud. The companies are buying and selling actual goods and services.

Nvidia and AMD sell chips. Oracle sells computers. CoreWeave is an AI-cloud infrastructure company that rents out data-center capacity. CoreWeave’s biggest customer is Microsoft, which is an investor in OpenAI, shares revenue with OpenAI, buys chips from Nvidia and has partnerships with AMD.

When Morgan Stanley analysts in an Oct. 8 report mapped out the AI ecosystem to show the capital flows between six companies — OpenAI, Nvidia, Microsoft, Oracle, Advanced Micro Devices and CoreWeave — the arrows connecting them resembled a plate of spaghetti.

The problem is that they are selling goods and services and making capital deals with each other. The expected investments into AI infrastructure, developement and business-to-business spending is expected to be orders of magnitude higher than end-user spending.

According to Google Gemini (which is based on an article I read last week):


One analysis estimates that new AI data centers built in 2025 will incur $40 billion in annual depreciation while generating only $15 to $20 billion in total revenue (combining both enterprise and consumer) for the owners. The revenue would have to grow by tenfold or more just to cover the depreciation and achieve a target return on capital....

The AI build-out is so massive that the AI-related capital expenditures (i.e., the cost to build the capacity) have been reported to have contributed more to U.S. GDP growth in the first half of 2025 than all traditional consumer spending combined.

This illustrates a fundamental economic dynamic: the current growth is fueled by companies spending huge sums on infrastructure (CapEx), not by the economic activity generated by end-user purchases (consumption)... [end quote]

It's worth reading my questions and Gemini's answers in full.
https://gemini.google.com/app/5b59f7597eea1988

The stocks of the tech companies in question all are grossly overvalued by traditional standards even if all their revenues led to actual end-user spending. The investments in AI resemble the investments made in internet infrastructure before the 2000 dot-com bubble burst.

Wendy

Hi Wendy,

Link busted or doesn't work for others

Jeff

https://www.wsj.com/tech/ai/is-the-flurry-of-circu...

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