xAI Teams Up with Nvidia in $20B Funding Round & Chinese Tech Stocks Hit Decade Highs

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Today's number?

2 billion.

That's how many dollars people spend in Turkey on hair transplants every year.

That's right.

One of Turkey's fastest growing exports is indeed hair transplants or as the Turkish like to call it, hope.

If money is evil, then that building is hell.

Show those up!

Welcome to Profit Markets.

I'm Ed Elson.

It is October 9th.

Let's check in on yesterday's market vitals.

The S ⁇ P 500 and Nasdaq hit new intraday highs and closed in the green as investors bought Tuesday's dip.

The Dow was flat.

The dollar hit a two-month high as economic concerns weighed down global currency peers.

And gold continued its rally above $4,000 to yet another record high.

Okay, what else is happening?

Elon Musk's AI startup, XAI, is teaming up with NVIDIA in yet another circular deal.

NVIDIA will invest as much as $2 billion in XAI, which XAI will then use to buy NVIDIA chips.

This will be part of a larger funding round for the company.

XAI will raise $7.5 billion in equity and $12.5 billion in debt.

In total, the company will likely raise $20 billion.

So another circular deal in AI.

We've talked about this many times before, where these big AI companies invest in these smaller AI companies who then use that investment.

They turn around, they buy their chips, they buy their compute.

We saw it with AMD and OpenAI this week.

We've seen it with NVIDIA and OpenAI, Amazon and Anthropic, et cetera, et cetera.

Well, now we are seeing it again with NVIDIA and this time with XAI.

So more of the same.

Here to help us break down this deal.

We are speaking with Bloomberg's Ed Ludlow.

He is the one who actually broke this story.

Ed, thank you for joining us on ProfG Markets.

Yeah, thank you for having me.

So NVIDIA is investing $2 billion in XAI, part of this $20 billion funding round.

You broke the story on Bloomberg.

Tell us, what do we know about this deal so far?

It's a complicated structure because it's not as simple as a group of investors making an equity investment directly into XAI.

What we've reported is that basically the pool of investors with XAI have set up a special purpose vehicle or an SPV.

And the SPV lives as its own entity.

It raises the capital, both in the form of debt and cash or equity, and then uses that bored capital to buy GPUs up front.

XAI doesn't buy the GPUs up front.

It rents or leases the capacity or the specific GPUs from the SPV, the group of investors,

over what we understand to be a five-year term.

So like the group of investors basically get regular payments, fees or rent.

XAI doesn't have to take the capital burden.

It gets access to the latest GPUs and it doesn't have to put any debt on its corporate balance sheet.

So it's an unusual mechanism.

I think we're still trying to report and find out the specifics of how all of these entities are bound together, but that's the logic behind it.

You mentioned that this could be a deal structure that we might start to see replicated in tech and in AI.

This SPV structure.

What are the benefits exactly for XAI?

And to what extent is this kind of financial engineering?

Well, as you've probably discussed in the program a lot of times, when it comes to the building of a data center, there are different models at play.

You know, if you are an OpenAI or an Anthropic or an XAI,

you don't necessarily want to have ownership of that infrastructure.

You just want to use it for either training or inference.

And so the benefit to XAI in

the deal that we've reported is it doesn't have to take on the capital burden up front.

But also companies like NVIDIA, basically NVIDIA leads this market, right?

They commit to updating their technology on an annual cadence.

They have a new generation of GPU or accelerator every year.

And so the problem with massive infrastructure at scale and how sources describe it to us is these GPUs might be the cutting edge right now, but in five years' time, they will be obsolete relative to

the latest generation then.

And so they are basically a depreciating asset.

The benefit to XAI and this structure is that it's kind of protected against that.

It doesn't have to have cash up front.

And over the course of that five years, it isn't responsible nor liable,

at least from a creditor's perspective,

to the value of those GPUs.

This might be a stupid question, but who is going to be liable then?

I mean, who is on the hook for these GPUs?

This, yeah, I mean, in our reporting, this is probably the one main unanswered question is like, at the end, what happens?

You know, for the investors, particularly, I suppose, in the debt portion of that structure, they get regular payments, right?

And so

one thing we do not know is under this SPV arrangement, who, if anyone, ends up with XAI equity, who ends up on the cap table.

But the other way of looking at it is that they get a guaranteed return.

XAI makes payments to them over time, be it monthly, quarterly,

and literally a lease payment or a rent payment as we understand it.

And so they will have that kind of visible income in five years' time.

What if they have to swap out those GPUs for a new cluster of the cutting edge generation?

We just don't know, but we're certainly trying to find out.

This is becoming sort of a theme in AI where you have, one, these extremely complex financial transactions between these hyperscalers and these AI startups.

And two,

this circular nature of these deals where you've got NVIDIA investing in XAI.

And then part of that deal is that XAI is going to take that money and then use that money to go back and buy chips, presumably from NVIDIA.

This has been getting a lot of attention recently.

We had it with AMD and OpenAI as another example.

Are you concerned yourself as someone who reports on this stuff?

Are you concerned about these circular transactions and the prospect that they might be creating a bubble in AI?

Well, since we broke the story about XAI and the SPV in particular, we actually know a lot more than we did at least, you know, before that.

And the reason I say that is that Jensen Wong has given some broadcast interviews following publication of the story where he was asked about it

explicitly.

And so we know that NVIDIA is participating.

Jensen didn't say out loud the dollar figure.

He said that he regretted he wasn't able to put more into this XAI financing.

But

what he went on to say is in the case of OpenAI, for example, which is a $100 billion commitment over a longer period of time,

NVIDIA makes it, has no requirement that OpenAI use that financial backing specifically to buy NVIDIA chips.

The example that he gave was that they are free to go and buy AMD chips using the backing that NVIDIA has given them.

The reason I use backing, by the way, instead of the word cash or money, is we still don't have a good sense of whether that 100 billion is literally cash or is it chips in lieu of cash or is it equity?

You know, at least with the the AMD OpenAI deal, we understand better that AMD issues a warrant for their stock to open AI only once OpenAI has funded its own build out of capacity.

So

to go back to the root of the original question, the leaders in this industry would push back and say it's not circular because there's no mandatory requirement that uh you actually use the cash or money that's coming from those chip names to buy their gear.

You can go shopping in the market for any chips you want.

It's very interesting to hear that.

I mean, my response to them, if I could respond to them, would be, sure, it's not mandatory.

It's not a mandatory circular transaction.

It's a voluntary circular transaction.

The prospect and the idea that OpenAI isn't going to spend that money on world-class chips from NVIDIA, the idea that they're not going to spend money on Blackwell,

that to me seems absurd.

I mean, sure, maybe they'll spend some of that money on AMD chips, chips, but

I feel quite confident that it's going to go back to NVIDIA in some capacity.

I'm wondering

if you feel the same way.

Yeah, Bloomberg published a very detailed piece about circular financing this week.

And there's a beautiful illustration or chart within that story that shows the flows, not just of capital, but it shows the flows of software, cooperation between the different names and hardware.

So if you say that this is more than just about investment and money, it's about in which direction do semiconductors flow and in which direction does the software that is built on that compute flow.

Yes, there are few players, but the net is a little wider than perhaps simply saying this is NVIDIA and OpenAI going back and forth with one another.

Ed Ludlow, thank you very much for joining us.

Really appreciate your time.

Thank you.

It's great to be on.

That was Ed Ludlow, co-anchor of Bloomberg Technology.

So XAI is joining the party, joining the circular deal party.

We've been talking about this for a while now, but now that we've seen so many in such a short amount of time, it appears that everyone is now catching on.

The media, analysts, investors, everyone is waking up to these circular arrangements and everyone is realizing that we could be creating a bubble in real time.

Some of the headlines we saw this week, NBC News, quote, big AI's reliance on circular deals is raising fears of a bubble.

From Bloomberg, quote, Open AI NVIDIA fuel trillion-dollar AI market with web of circular deals.

From Semaphore, quote, circular investment deals by major AI companies spark bubble fears.

So everyone knows what is happening at this point.

And yet, despite the fact that we all know it, no one is slowing down.

In fact, we are seeing more circular deals, more AI investment.

Jensen Huang, Elon Musk, Sam Altman, all of these tech leaders are apparently pretty unfazed by what we are all describing.

And by the way, so are investors.

I mean, the markets keep climbing.

The S ⁇ P and the Nasdaq both hit record highs.

People continue to invest in AI.

So the big question then, if everyone sees what's happening, if everyone recognizes the problem, they recognize these circular deals, they recognize how this could be creating a bubble, well then why is everyone ignoring it?

That is my question, at least.

And I don't have necessarily an answer, but I do have a feeling.

And my feeling is that there is one thing that is driving this, one thing only, and that is FOMO,

which is the fear of missing out.

Whether you are Sam Altman or BlackRock or even a retail investor, what is happening here is the prize of winning AI,

that prize appears to be so great that we have all decided it is worth it no matter what.

Yes, it might be a bubble.

And yes, we might get burned pretty dramatically.

But it's the fear of not being part of AI.

It's the fear of not being part of perhaps the greatest technological revolution of the century.

That fear is overriding almost everything.

In fact, tech CEOs seem to acknowledge this.

Zuckerberg himself, he said an AI bubble is quote, quite possible, but he also said that he would rather quote, misspend a couple of hundred billion than miss the chance at superintelligence.

That is the philosophy of AI investment right now.

The prize is too big.

You have to get on the train, even if you're running the risk of flying off of the rails and bursting into flames.

These AI leaders, they say, no, doesn't matter.

We have to do it.

You have to do it.

Now, where does that lead us?

Where are we headed?

Not exactly sure.

But what I can say is that I am reminded of a scene from one of my favorite Wall Street movies.

And that movie is Margin Call, a great movie about the 2008 financial crisis.

And what you have is this scene where Jeremy Irons is playing the head of a big Wall Street bank, and he's sitting at lunch, and the crisis is unfolding.

And he's explaining why these bubbles happen and he goes through every bubble and every crisis he goes through 1901 1929 1937 1974

1987 jesus didn't that

me up good 92 97 2000 and whatever we want to call this it's all just the same thing over and over we can't help ourselves we cannot help ourselves cannot help ourselves he says we can't control it we can't stop it we can't even slow it.

All we can do is react to it.

After the break, what is driving China's stock market rally?

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We're back with Profit Markets.

China's stock market is on a tear.

The CSI 300, that is essentially China's S ⁇ P, that is up 21% this year and it is currently above a three and a half year high.

The rally is fueled in part due to excitement over AI with tech stocks pushing the CSI 300 tech index to its highest level since 2015.

So a huge rally happening in China right now.

For more on why this is happening, we are speaking with Profit Media's very own Alice Han, host of the China Decode podcast and also a China economist at Greenmantle.

Alice, great to have you on the program.

Thanks so much, Ed.

Great to be here.

First, I got to ask you, how's it going being part of the Property family?

Well, I'm learning a lot.

And I have to say that the team moves so quickly.

I'm very impressed.

Very impressed by the caliber of the team.

And I love the banter with James.

He's the best partner ever.

Well, I've been loving listening to you guys.

I think you guys are doing a great job.

So we want to understand what's going on with this rally.

We're climbing towards this four-year high.

This time last year, the index was bottoming out.

What's changed?

What's causing this rally?

I think there are a number of things at play.

Number one, we've seen a pivot by Beijing towards being more supportive of the private sector, of tech companies, and certainly of

the rebalancing of the economy.

I think when you put together that mood music, that's largely a top-down directed mood music, I think investors, both in the mainland and foreigners, are looking more keenly towards Chinese equities versus this time last year.

Number two, when we think about the landscape of a weaker dollar of valuations being a bit too stretched with the Mag 7 in the States, I think a lot of investors are looking elsewhere to diversify their portfolios.

My own sense is that AI is going to be a two-player game driven by China and the US.

So if you look at the PE ratios of Chinese big AI companies, whether it's Tencent, Alibaba, or even the semiconductor companies that support the AI infrastructure, these I think are priced pretty attractively, which is why we've seen a lot of movement and inflows from foreign investors back into the mainland.

And the third part of it really is, is I think a big push, which I suspect is top-down as well as bottom-up, towards AI in every aspect of the economy and technology and society.

My own sense in the five-year plan, which we discussed this week that will be unveiled after October 23, is that AI is going to be a cornerstone and a key part of the economic policy for at least the next five years.

So I think when you put all that together, it's very clear to a lot of observers.

both domestically and in the foreign investment market that Chinese tech companies are way more attractive now than they were a couple of years ago and certainly priced very attractively.

Yeah, tell us a little bit more about that five-year plan.

What is that five-year plan?

What are they trying to do with it?

So, China followed the Soviet model starting in 57 with these five-year plans that are targeted towards laying out China's economic, strategic, even military, and society-related goals.

And certainly, what we've seen in the last few five-year plans is a pivot towards being a technology-driven economy.

My own

suspicion is that in the next five-year plan, we're going to hear a lot of talk about what Xi Jinping coined in 2023, the new quality productive forces.

This basically means high-quality tech-driven growth that rests on innovation, especially in some of these core emerging technologies, whether it's semiconductors, AI, biotech, even aviation and

maritime equipment.

equipment.

I sense that this is going to be the key pillar of the next five years.

And the way that the government approaches the five-year plan is to basically lay out what they see as the eight, ten, even more strategic priorities for the government over the next five years to achieve in order to meet its internal KPIs.

So when we look at the rally that we've seen in the US, the story is basically just AI.

I mean, it's driven, I think, between 70 to 80 percent of the gains in the S P this year.

To what extent is AI behind the rally in China?

Is it the same story happening there that everyone's so excited about Tencent?

Everyone's so excited about Alibaba.

Perhaps everyone's so excited about DeepSeek.

That's why sentiment is growing in China, or are there other factors that are playing more of a force compared to the US?

Yeah, it's a great question, Ed.

I think that AI is only part of the story.

And again, I walk back to what I previously stated, which is that in the last few, five-year plans, technology has become front and center as a main KPI for this government and for Xinping.

And the reason I say that is because when you look at the PE ratios of, say, BABA and Tencent, yes, they are higher than some of these other consumer platforms or even other companies, but it's not just an AI-driven story.

When you look at

the health of these companies or even the performance of these companies in the CSI 300 or even in the Hang Seng Index, what is clear to me is that, yes, year-to-date performance in AI adjacent or AI-directed companies like BABA and Tencent have been very strong.

But at the same time, what I've seen is that biotech, for instance, or pharmaceutical companies, their year-to-date performance has actually outpaced even these big consumer AI tech platforms.

So I think it's a bit more than this.

And when we peel back the layers, it's very evident to me that China is trying to basically domesticate and onshore as much of the technology stack and supply chain as possible.

So when I look at, say, for instance, BYD or even CATL, when I look at the EVs, the battery spaces, the biotech, the green energy spaces,

we've seen very strong performance in those sectors independent of AI.

And I think this is a story more broadly of, again, a top-down, but also a bottom-up approach towards trying to indigenize technology as much as possible.

And what happens when you put that in the biggest warehouse in the world, which is China, it is that you decrease prices, but you also increase scale.

And China, again, reflected in the trade surplus globally, is basically creating a ton of technological goods that they are then exporting to the rest of the world.

So I think it's more than an AI story.

It is a really tech superpower story that, again, makes the most of China as a supply chain giant.

Just looking at multiples and the valuation, we were talking about the price to earnings ratio in China, which I think is around 11.

You look at the S ⁇ P at around 27, 28.

So still a huge disparity there.

One of the themes we've been discussing is we think that there is probably going to be a little bit of a mean reversion, and that is the gap will probably start to close a little bit.

Just wondering if you feel the same way about that.

I definitely feel that there is going to be more of a narrowing of the gap and a mean reversion, as you say, Ed.

It makes sense given historically even I think these PE ratios are still considered low by Chinese standards.

I also think that as people start to talk more about the AI bubble in the US

and as there is more kind of hesitancy about being too exposed to US equities and US currency, there is going to be a more rotation into China.

We're also already seeing an EM rotation out of, say, India, which was once the Darling in the last few years,

back to China.

So I think it only makes sense that people are getting more constructive about Chinese equities.

We're going to see a narrowing in the gap.

I will also say that there is an opportunity to this five-year plan.

And again, this is why it's so important to think about what the government is going to prioritize as the strategic sectors.

Because to my mind, if you look at Made in China 2025, if you focused just on every single sector that they targeted, you would have made a lot of money.

So, again, this is why these five-year plans, these industrial policies, are extremely important because it helps investors figure out what exactly is Beijing going to concentrate on and apply a lot of resources and support.

Just a final question here for people who are looking at the Chinese markets and figuring out a way to invest, just to go through some of the big names that we should have on our radar.

I mean, the names that come to mind for me, as you said, Tencent, Alibaba, BYD, are there any other big names that everyone is super excited about in China?

Any other big companies that we should be thinking about if we're investing in China?

So you've already named the big AI ones.

DeepSeek isn't publicly listed yet, but certainly has raised the tide for all of these AI-adjacent and AI-directed companies.

I would also say, on top of that,

beyond the usual suspects, everyone talks about BYD and CATL.

We're already starting to see, I think, again, a mean reversion because profits are starting to slow in those green tech companies.

And I think that will be a trend going forward.

But I do suspect that there are going to be some exciting stories in robotics as well as in semiconductors.

And in the robotics field, I think Unitree is a supreme leader in this field.

They're already announcing that they will roll out pretty affordable, by global standards, humanoid robots in 2026.

And again, in semiconductors, I would point to

SMIC, which is China's big fabrication firm for semiconductors, high-end leading edge semiconductor technology.

Still can't rival TSMC, but given that the government is trying to support support indigenous supply as much as possible, I think they, along with Huawei, will be the frontrunners.

And then you've got some interesting equipment providers and chip design providers like NARA and Biran and the semiconductor space.

So I think these are some of the other names that can be tossed around.

Because again, to your previous question, Ed, it's not just an AI story.

It's a sort of whole technology stack story.

All right.

Alice Hahn, China economist at Green Mantle and host of China Decode, part of the Prof G family.

Always good to have you on.

Thank you for joining.

Thanks so much, Ed.

All right, that was Alice Han.

If you want to hear more from Alice on all things business, politics, and culture in China, go listen to the China Decode podcast.

It comes out every Tuesday on the ProfG pod.

You can find it wherever you get your podcasts.

That's it for today.

This episode was produced by Claire Miller, edited by Joel Patterson, and engineered by Benjamin Spencer.

Our associate producer is Alison Weiss.

Our research team is Dan Shallan, Isabella Kinsell, Kristen O'Donoghue and Mia Silverio.

Our technical director is Drew Burroughs.

Thank you for listening to Profit Markets.

If you liked what you heard, give us a follow.

I'm Ed Elson.

Tune in tomorrow for our conversation with Catherine Ann Edwards.

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