The AI Industry Has a Huge "Credit Card Debt" Issue

Earlier this month, OpenAI CEO Sam Altman said the quiet part out loud, telling reporters that he believes we're in a "phase where investors as a whole are overexcited about AI."

Simmering concerns about a growing AI bubble — a word repeatedly invoked by Altman himself during the appearance — have gripped the industry, with spooked investors triggering a major tech sell-off in the wake of the CEO's remarks.

Also fueling these fears was an MIT investigation that found a staggering 95 percent of attempts to incorporate generative AI into business so far are failing or stalling out.

And looming over it all is an inconvenient truth: the AI industry is putting the massive tab for all its AI infrastructure on the figurative credit card, as Bloomberg reports, incurring immense debt that's giving some experts an ominous feeling of déjà vu.

"It’s natural for credit investors to think back to the early 2000s when telecom companies arguably overbuilt and over borrowed and we saw some significant writedowns on those assets," Citigroup head of US investment grade credit strategy Daniel Sorid told Bloomberg. "So, the AI boom certainly raises questions in the medium term around sustainability."

Many of the key players are also transitioning from cash flow-backed corporate debt to private credit, causing experts to become antsy.

"Private credit funding of artificial intelligence is running at around $50 billion a quarter, at the low end, for the past three quarters," UBS head of credit strategy Matthew Mish told Bloomberg. "Even without factoring in the mega deals from Meta and Vantage, they are already providing two to three times what the public markets are providing."

At the core of the issue is a practical money problem. Despite companies pouring ungodly sums of money into data centers to feed immensely power-hungry AI models, the industry has yet to prove a viable path to profitability, at least within the near future.

"Data center deals are 20 to 30-year tenor fundings for a technology that we don’t even know what they will look like in five years," S&P Global Ratings global head of private market analytics Ruth Yang told Bloomberg.

But whether we're looking at an impending bubble bursting remains a point of contention. Pushing executives into even more AI spending is "AI FOMO," as Business Insider put it, which remains as seductive as ever. (The pressure has reached such a fever pitch that even OpenAI is warning would-be investors not to get scammed in the fervor.)

In a blog post, the Altman-led company warned over the weekend of "unauthorized OpenAI equity transactions."

"We urge you to be careful if you are contacted by a firm that purports to have access to OpenAI," the company wrote. In the case of any attempts to "circumvent our transfer restrictions and other terms and conditions," such deals "will not be recognized and carry no economic value to you."

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