America's massive economic bet on the AI build-out; Thoughts on the Anthropic and OpenAI IPOs; Oracle's data-center build-out is showing some cracks

1) The Wall Street Journal came out with an insightful article this week on the staggering size of the AI-infrastructure boom and its impact on construction, financing, jobs, the wealth effect, and inflation...

As the title argues, "The AI Build-Out Is Becoming the Biggest Economic Bet in U.S. History."

This is quite a chart from the article:

Astoundingly, only five companies account for such a huge amount of the spending – as this chart from the article shows:

As the WSJ notes:

The investment is transforming every corner of the economy, creating hundreds of thousands of jobs and minting new billionaires.

It is also creating significant risk, as much of it is built on debt. An abrupt slowdown could ignite shock waves throughout the U.S. economy.

The questions on everyone's minds are:

Is this a bubble? And if so, when and how will it pop?

I still believe it's a bubble...

It reminds me in so many ways of the Internet bubble at the start of my investing career more than a quarter century ago. Both are characterized by:

• Unproven business models

• Unprecedented losses

• Looming regulation

• High-quality, low-cost competition from China

• Narcissistic CEOs

• Massive circular financing

• Rising debt, worsened by huge off-balance-sheet financings

• Young investors mocking their elders for not understanding the new paradigm and missing the boat

That said, none of this means the bubble is about to burst anytime soon.

I never cease to be amazed by how long obvious bubbles can inflate and the size they can reach.

2) I think a key test of the AI boom will be the upcoming IPOs of leading LLM ("large language model") makers Anthropic and OpenAI...

Both are losing money (in particular, I've called OpenAI a "cash-burning furnace"). And yet, they're seeking trillion-dollar-plus valuations. That would make them among the most valuable companies on the planet.

If Anthropic and OpenAI successfully go public at such high valuations, it will fuel their massive spending – and keep the bubble inflating – at least for a while.

As of earlier this morning, real-money bettors on Kalshi think there's a 72% chance that Anthropic announces its IPO by the end of the year and an 89% chance before March 1, 2027. Shares would likely begin trading four to five months later.

I think the chances are somewhat lower. But ultimately, Anthropic will go public by mid-2027 – albeit at closer to a $1 trillion valuation than the $2 trillion that's being discussed today.

But I'm skeptical that OpenAI ever goes public...

As of earlier this morning, bettors on Kalshi think there's only a 63% chance that OpenAI announces its IPO by June 1 next year.

Unlike Anthropic, OpenAI's free cash flows are getting worse every quarter – as I showed in this chart created by my friend James Emanuel in my August 24 e-mail:

If I'm right that OpenAI fails to go public, it could quickly run out of money and fail spectacularly. And that would drag down the entire sector.

3) We may have seen another potential catalyst for the bursting of the AI bubble yesterday...

Oracle (ORCL) sent a "force majeure" notice connected to its enormous Project Jupiter AI data center in New Mexico. As my friend Chris Irons (aka Quoth the Raven) explained in a Substack post:

[Force majeure] is a contractual provision generally invoked when extraordinary circumstances outside a party's control interfere with, or threaten to interfere with, its ability to perform under a contract. Oracle reportedly issued the notice to a unit of Blue Owl Capital (OWL) developing Project Jupiter, citing potential delays in securing power and protecting Oracle financially if the facility doesn't come online as scheduled.

And as Chris continued:

Project Jupiter is a massive New Mexico AI campus tied to the Stargate buildout and Oracle's relationship with OpenAI, requiring roughly 2.4 gigawatts of power and relying heavily on Bloom Energy (BE) fuel cells. The problem is that a natural gas pipeline needed to supply the site has reportedly been pushed back roughly six months following permitting problems, while a separate air quality permit for the fuel cell system remains pending.

Shockingly, shares of Oracle, Blue Owl, and Bloom Energy were only down 3% to 4% yesterday – as Oracle rushed to reassure investors.

In a post on X, Oracle said that "Project Jupiter remains on our planned schedule. We are fully committed to New Mexico and confident in our path forward."

In a follow-up X post, the company added:

Force-majeure notices are commonplace in developments of this scale and are often used to preserve contractual rights among project partners. They do not, by themselves, establish a project delay or change delivery expectations.

Then, Bloom Energy posted this on X:

As discussed with Oracle an hour ago, Oracle remains committed to Project Jupiter and its contract with Bloom to deliver 2.4 [gigawatts] of fuel cell capacity. We are excited to execute Project Jupiter on Oracle's planned timeline.

In other words, "Move along, nothing to see here."

Yeah, right!

Whether this is a small hiccup or the first leak in a dam that could burst remains to be seen. But as this new WSJ article notes, it couldn't come at a worse time for Oracle:

Pulling the force majeure lever buys Oracle some time but doesn't reduce its financial exposure to the data center...

Lenders are showing signs of unease about their exposure to Oracle. At least one bank that arranged New Mexico loans sold off a portion of the debt for a price below 90 cents on the dollar, people familiar with the matter said. Earlier this year, banks struggled to sell billions of dollars of loans they made to build data centers leased to Oracle in Texas and Wisconsin, the Wall Street Journal previously reported.

And as the article continues:

The sales of the New Mexico construction loans imply a paper loss of at least $1.8 billion for original lenders...

Bond investors have also raised questions about Oracle's financial stability and its investment-grade credit rating. S&P Global Ratings downgraded Oracle's credit rating to one notch above "junk" territory in July, saying that its "rapidly expanding AI infrastructure business is increasing its overall credit risk." Its capital spending on AI equipment and property has exceeded its cash flows from operating its business for several quarters.

I'm tempted to add Oracle to my "Stinky Seven" list of stocks to avoid...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

P.P.S. I've been visiting my parents this week at our extended family's house on Lake Sunapee in New Hampshire.

Normally, by now they would have flown home to Kenya. But my dad is scheduled to have a transcatheter aortic valve replacement ("TAVR") at Dartmouth Hospital on November 4. It's a minimally invasive procedure to fix his narrowed heart valve, which doctors discovered after he had a ministroke a little over a month ago. Hopefully this will cure the chronic weakness and occasional dizziness he has been experiencing.

Here's a picture of all of us: