‘I lived through 2000, I don't want the sequel’: Jim Cramer says AI's circular financing is getting out of hand

Fears are percolating again about circular financing in the AI race, and Wall Street's focus is landing on Nvidia (Nasdaq:NVDA), which is fast becoming a chipmaking behemoth in the AI development race. In late July, the company announced a $500 billion partnership with South Korean conglomerate SK Group to power AI infrastructure including factories and memory supply. It's also in negotiations with OpenAI for a $250 billion backstop designed to enable a new data center project in southern Ohio, according to the Wall Street Journal.

The massive sums of cash moving from lender to buyer in AI's ecosystem are stirring renewed fears among investors about arrangements in which Nvidia and other AI companies finance firms or projects that artificially boost demand for its products. If the transactions fail to generate profits, this strategy runs the risk of amplifying losses for companies staking their future on AI.

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Prominent analysts are drawing comparisons to the dot-com bubble from over two decades ago, during which nascent dot-com firms wagered on rapid adoption of the internet, betting it would yield sizable profits in short order. When tech stocks tanked, cash-starved dot-com start-ups floundered soon after. Some investors fear living through a similar replay with AI.

"There are so many companies counting on the data center for their earnings," CNBC host Jim Cramer said on the air. "If the market decides it doesn't want to fund any more data centers, and the companies themselves don't have the money, or they don't get paid, then we're back in 2000."

He added: "I lived through 2000. I don't want the sequel."

So far, Nvidia is betting that its staggering spending will pay off, given the unchecked appetite among hyperscalers for all types of semiconductors to power their data centers. Wall Street analysts, though, are observing that capital is increasingly circulating among the same batch of companies who sometimes serve as both financier and supplier.

"While strategic equity stakes in emerging technologies have been common among established tech companies, the degree of interdependence among AI labs, hyperscalers, semiconductor suppliers and sponsors is greater than traditional venture capital relationships, representing a more circular system that could mask true demand," Moody's Analytics said in a report published in July.

For investors attempting to gauge the risks to their portfolio, these circular arrangements are causing some to expand their holdings beyond AI companies and the tech sector. Diversifying serves to fortify investments against an unexpected disruption in the AI ecosystem.

"We continue to caution investors not to become too concentrated in technology," Miramar Capital co-founder Max Wasserman told Yahoo Finance late last year.

Being able to determine a firm's ability to break out of its circular arrangement and generate profits with clients led one AI analyst to dub it as "the ultimate test" for investors in the AI boom.

"AI companies must eventually generate revenue from external clients outside the Big Tech circle to pay off their massive infrastructure debts," wrote Ege Eksi of Seedscope AI, an AI valuation platform, in a blog post. "The transition from capital-fueled growth to genuine, customer-driven utility is the ultimate test."

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This article originally appeared on Moneywise.com under the title: 'I lived through 2000, I don't want the sequel': Jim Cramer says AI's circular financing is getting out of hand

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