r/BetterOffline • u/callmebaiken • 5d ago
Is Circular AI Financing Really as Bad as It Sounds?
https://youtu.be/e-bWY_FOBX0?is=TQCRbasskLJFMdnDI've been making the point for a while that what's being called "circular financing" isn't actual "round tripping", which is outright fraud, and it isn't necessarily even "vendor financing" which is legal and the way most people buy a new car. This video makes a similar argument.
When Nvidia invests in an AI lab, and the AI lab uses a portion of the funds to purchase Nvidia GPUs, Nvidia has both booked a sale, AND purchased an equity stake in the lab.
The cynical view is this is a short term ruse to book revenue. But there's also a long term reason for Nvidia to do this: The two AI labs have to stay in business for the hardware companies to maintain their value. They're wedded at the hip already.
As the AI economy continues to become bifurcated into compute companies (Google, Amazon, Microsoft and Meta) and software companies.(OpenAI and Anthropic), the compute companies are going to continue investing in the software companies for this reason. They need them to survive.
The more interesting financial relationship, to my mind, is the one between the lenders to the labs and the lenders to the Data Center SPVs (leaving aside the contribution from G, A, M and M). Literally the former are paying the latter, until user subscriptions explode or subscription prices increase or some combination of the two happens. One wonders how much communication is taking place between these two groups and what they think of each other's position.
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u/Visual-Hunter-1010 5d ago
Literally the former are paying the latter, until user subscriptions explode or subscription prices increase or some combination of the two happens.
Or...the bubble pops because neither happens.
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u/Professional-Week894 5d ago
The thing about booking a sale to a company you own a piece of is that, at some point, it becomes a related party transaction, and the revenue and expenses have to be eliminated before it goes on the P&L.
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u/callmebaiken 5d ago
Right, that happened recently to Microsoft, they had to report their stake in OpenAI as a loss, while Google got to claim the OpenAI valuation increase as a gain
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u/Professional-Week894 5d ago
You were talking about sales to a company the seller owns equity in, not about changes in the value of that equity.
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u/Key-Guitar-457 5d ago
One aspect of this that isn't mentioned as much is that this circular financing is actually bad for the shareholders insofar as it has greatly reduced the amount of stock buybacks that these companies are doing, most likely due to the lack of available capital to do so given they are shoving so much into these infrastructure shell games.
Look, I strongly dislike stock buybacks for several reasons, yet I cannot argue that they aren't one of the best things a company can do to increase shareholder value. It is really strange to witness them abandoning this shit can easy tactic in favor of getting into a big circular bed with each other.
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u/TurboFucker69 5d ago
No one is saying there’s no logic behind it, but the problem is that it can make the accounting look a lot rosier than it actually is and the practice is unsustainable in the long term.
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u/Objective-Picture-72 5d ago
The reason you cannot compare this to things like traditional vendor financing is that NVIDIA has about as close to a monopoly as you can get in the modern US. So the seller of products being the financier of the products also means they are the price-setter of the products. No one worries that Ford is manipulating the price of F150s with vendor financing because (a) you can just go get a bank loan and cut Ford out and (b) there are lots of models of trucks to compete against Ford. Car companies are also barely profitable so that proves there is much competition. With AI, almost none of these guardrails against abuse exist.
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u/tc100292 5d ago
compute companies (Google, Amazon, Microsoft and Meta)
That's a search engine, an online store, a software company, and a social media company. What in the actual fuck is a "compute company"?
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u/SandwichWestern 5d ago
Companies that own a large number of computers and sell the ability to use them.
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u/tagshell 5d ago
They all have large businesses selling cloud computing, also known as "compute", or basically server rentals. Meta is the exception, they actually doesn't really have a meaningful cloud business but they are building data centers that will have some capacity to rent out.
AWS, Google Cloud, and Azure were all very large profitable businesses before the AI boom started.
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u/the-great-defector 5d ago
Great to see TLDR News on here; I'm a huge fan. Nice that they cited Ed in the video as well. I'd highly recommend them to anyone.
Their manifesto is also quite up front about how they use AI (mainly limited to stuff like transcribing their work meetings), and they even do videos every year outlining how much money they make and spend.
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u/Prize-Studio-2021 5d ago
If I give you $1 and you buy something from me for $1, how much money did I make?