The problem is that stocks are often valued and traded on revenue growth, not profit[0] So circular funding generates stock price bumps when, as you said, there's no inherent value underneath. Creates a recipe for a crash.

[0] consider pagerduty, incredibly profitable with little revenue growth. Trading at 1.5X revenue, where high revenue growth, unprofitable companies are trading at 10X revenue.

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danvayn 16 hours ago | parent | next [-]

I feel like it's almost more of a Popular stock thing. Consider if pagerduty eked out an empty deal with any one of the "Pop stocks" that had little impact on their real profitability. Would stock trade differently or better? It feels like it really would in the modern market. Like even if the numbers weren't a big change, the buzz would be.

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cyanydeez 17 hours ago | parent | prev | next [-]

Its crypto wash trading.

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shwaj 16 hours ago | parent | next [-]

Why? Wash trading is about selling and then requiring the same asset for tax purposes. How is this analogous, other than that you presumably dislike both practices?

	▲	myownpetard 15 hours ago \| parent [-]
		In crypto, wash trading usually refers to the practice of exchanges or project creators colluding to trade the same asset back and forth in order to make the volume/liquidity/popularity look greater than it is. - "Our coin hit $100M daily volume, get on this rocketship before it's too late!" - "Our exchange does $1B annually, so you know we're trustworthy!" - "Hey investors, look at the massive demand for our GPUs (driven by the company we invested $100B)!"

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echelon 16 hours ago | parent | prev [-]

Nvidia is buying customers that will likely have increasing need for Nvidia. Those investment dollars will be spent on Nvidia. Future dollars will be spent on Nvidia.

Second order effects are that everyone serviced by AI today will need even more AI tomorrow. Nvidia is there for that. They're increasing AI proliferation.

By increasing the number of engineers, dollars, watts spent on GPU, Nvidia grows its market.

The added benefit here is that Nvidia gets to share in the upside if any of these companies succeed in their goals.

It's as if Microsoft had Azure back before the doctom boom and took investments in Google, Amazon, and Facebook in exchange for hosting them. (And maybe a few misfires, like WebVan.)

This is really smart chess play.

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mewpmewp2 17 hours ago | parent | prev [-]

Both are taken into account. Potential profitability is taken into account with growth companies. Circular funding has no effect on that. With unprofitable companies case is made on how risky the company is and what the potential profit will be in the future.

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mvkel 15 hours ago | parent [-]

I would disagree, at least in the short term. Exhibit A: AMD's stock rose 36% at the announcement of their OpenAI circular deal. If 1+1 = 3 and there is potential profit to be gleaned from such a deal, then it isn't circular, and is just plain good business. But the fact that AMD's stock collapsed back to where it was shortly after suggests otherwise

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mewpmewp2 14 hours ago | parent [-]

This isn't to do with this being circular. It is moreso that AMD is thought to be falling behind in AI race, but OpenAI doing a deal with them is a strong indicator that they might have potential to come back.

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mvkel 13 hours ago | parent [-]

That's a generous interpretation.

The deal allows OpenAI to purchase up to 6GW of AMD GPUs, while AMD grants OpenAI warrants for up to 10% equity tied to performance milestones, creating a closed-loop of compute, equity, and potential self-funding hardware purchases. Circular.

From the announcement per se, AMD's stock rose to a level that effectively canceled out whatever liabilities they were committing to as part of the deal, so it was all gravy, despite it being a press release

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mewpmewp2 13 hours ago | parent [-]

Why is that generous? This is clearly showing OpenAI's belief in AMD, which in turn would give investors a large amount of confidence. A lot of that market cap came from Nvidia, which lost around 50B that day while AMD gained 70B in market cap. It all makes sense to me.

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mvkel 13 hours ago | parent [-]

Why would it erase that same 70B just a week later? No more confidence?

	▲	mewpmewp2 13 hours ago \| parent [-]
		Where do you see the 70B being erased? But in any case it is also plausible that a confidence changes given new stream of constant information, so I don't see how it would be problematic if it did lose given new information.