AI boom shows signs of a bubble as borrowing, competition mount
Heavy borrowing, uncertain demand and increasing competition suggest the AI boom may be a bubble. Companies such as CoreWeave and Anthropic rely on debt and funding loops, while slowing revenue growth and rising bond yields signal risk. Investors should judge expansion by earnings that cover full co
The AI boom looks increasingly like a bubble because heavy borrowing, uncertain demand and increasing competition are reinforcing one another, according to tech startup founder and YouTuber Allen Au. The real danger is that companies are building for a future in which customers keep spending more, even as competition and advances in technology could make computing power cheaper.
AI cloud company CoreWeave borrows to buy graphics processing units – the chips used for AI computing – and rents out their computing power, with some loans secured by equipment and customer contracts. If demand does not grow as expected, those debts still have to be repaid. Chipmaker Nvidia supplies chips to CoreWeave, invests in the company, and has agreed to buy residual unsold capacity. This creates a funding loop: Nvidia helps finance a customer that buys its chips, then buys computing capacity from that customer. The tricky part is that this arrangement can encourage more borrowing before demand can stand on its own.
Renowned investor Michael Burry's 27 October analysis of AI firm Anthropic's S-1 IPO filing highlights similar links. Anthropic can issue debt to chipmaker Broadcom or a designated partner to finance equipment rent, with conversion into shares possible. Such financing can buy time, but it does not show that the business earns enough to cover its own bills. Although Anthropic's US$80.7 billion (HK$629.5 billion) first-half net loss was largely driven by noncash financing revaluations, the slowdown in reported quarterly revenue growth from about 145 per cent to 45 per cent is more telling. Fierce competition could push prices down, making fast growth harder to sustain.
Anthropic's tighter restrictions on mainland Chinese and Hong Kong users could also push business toward rivals such as Grok, Cursor or OpenAI where available. Limiting potential customers makes ambitious spending plans harder to defend. Some CoreWeave bond yields reached around 15 per cent in October, signaling concern about repayment rather than a change in all its debt payments. If refinancing becomes costlier while competition pushes rental prices down, margins could shrink adversely. Falling GPU resale values could also weaken the collateral, and lenders could face losses alongside their borrowers.
Au wrote that AI may change the economy, but that does not mean customers will pay enough to justify every data center. Investors should now judge expansion by earnings that can cover its full costs, especially when debt payments cannot wait.