Investment bank Morgan Stanley said Wednesday that it is concerned about the circular financing of many hyperscale artificial intelligence projects. Meanwhile, AI infrastructure stocks are surging.
“The AI ecosystem is increasingly circular — suppliers are funding customers and sharing revenue; there is cross-ownership and rising concentration,” analyst Todd Castagno said in a report. “More sufficient disclosure is warranted to understand these relationships.”
The report comes the same day that AI chip supplier Nvidia (NVDA) revealed it has invested in Elon Musk’s AI startup xAI and will supply processors for xAI data centers. Nvidia also has supplier-investor arrangements with CoreWeave (CRWV) and OpenAI.
Additionally, on Monday, Nvidia rival Advanced Micro Devices (AMD) announced a supplier-investment deal with OpenAI.
“Investor attention is increasing to the intertwined relationships of AI players,” Castagno said.
He added, “Increasingly complex transactions make it challenging to evaluate how demand for AI is developing and increase risk around AI’s success. The sustainability of the current investment cycle ultimately depends on whether AI generates durable cash flows to support returns on the significant capital being committed.”
The parties involved need to be more transparent about the risks and other implications of their partnerships, Castagno said.
Disclosure Key For AI Stocks
“The entities within the entangled ecosystem have provided limited information about customer concentration, vendor financing, revenue-sharing agreements and related-party transactions,” he said.
Microsoft (MSFT) and Oracle (ORCL) are other publicly traded companies with AI data center deals that need more transparency, Castagno said.
“Because hyperscalers have massive non-AI businesses, disclosures around their transactions with AI companies fail to meet ‘rule of thumb’ quantitative materiality thresholds,” he said. “However, AI is the key driver of valuation for these companies, supporting their high multiples.”
AI infrastructure stocks continue to be top performers on the market. Chipmakers AMD and Nvidia are trading at record-high levels. Server makers Dell Technologies (DELL) and Super Micro Computer (SMCI) also are on the upswing of late.
Follow Patrick Seitz on X at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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