Key Takeaways
- Walmart shares soared this week after it announced a commerce partnership with OpenAI that will allow ChatGPT users to buy Walmart merchandise directly through the chatbot.
- OpenAI deals have fueled the latest stretch of the AI rally, but have also raised eyebrows on Wall Street, where an increasing share of investors worry AI is in or approaching a bubble.
- The OpenAI-Walmart partnership could allay some investor fears by boosting OpenAI’s revenue, reducing its debt burden and demonstrating AI can deliver tangible returns on investment.
The OpenAI fairy dust that has boosted tech stocks this year is spreading to new sectors.
OpenAI and Walmart on Tuesday announced that ChatGPT users will soon be able to have the chatbot shop at Walmart for them without leaving the app. “Whether planning meals, restocking household essentials, or finding something new, customers can simply chat and buy, and Walmart will handle the rest,” Walmart said in a statement.
Walmart (WMT) stock rose on the announcement, gaining nearly 5% on Tuesday, its best day since early April. Shares tacked on another 2% on Wednesday to close at a record high and pace Dow Jones Industrial Average gainers for the second straight day. The stock lost ground on Thursday.
For OpenAI—which has been at the center of the deal-making lately that has sparked concerns about a possible AI bubble—the partnership with the world’s largest retailer represents an important step in its efforts to prove commercial viability. While the terms of the deal weren’t disclosed, OpenAI is likely to receive a commission from sales made on its platform, which could reassure some market watchers concerned about the ability of OpenAI to generate revenue and reduce its debt burden.
Why This Is Important
With stocks trading at record highs despite heightened economic and geopolitical uncertainty, some investors have grown concerned that the AI rally fueling stock gains looks a lot like the Dotcom bubble of the late 1990s. When that bubble burst, the tech-heavy Nasdaq index lost nearly 80% of its value and took about 15 years to recover.
OpenAI Deals Fuel Rally—and Bubble Concerns
Walmart is the latest company whose stock has skyrocketed on the announcement of a tie-up with the world’s most valuable private start-up. Shares of Broadcom (AVGO) soared nearly 10% Monday after it signed a deal with OpenAI to co-develop and deploy custom AI systems. Advanced Micro Devices (AMD) inked a similar deal with the company last week, and its stock added nearly 25%. Even a simple shoutout at OpenAI’s developers conference is enough to lift shares.
OpenAI’s recent dealmaking bonanza has sustained the latest leg of a nearly three-year bull market fueled by big tech and the AI boom. But it has also raised red flags on Wall Street, where some worry about the circularity of the deals underpinning lofty stock valuations.
More than half of global fund managers surveyed by Bank of America in early October said they thought AI was in a bubble, and one-third identified an AI bubble as the stock market’s biggest tail risk, more than inflation (27%) and challenges to the Federal Reserve’s independence (14%).
Those worried about a bubble compare Nvidia’s (NVDA) recent investments in OpenAI and cloud providers like CoreWeave (CRWV) to the vendor financing deals that heralded the bursting of the Dotcom Bubble in 2000. They also note that the AI data center buildout, which has mostly been funded by big tech’s healthy cash flows, is increasingly being financed with debt, exposing the infrastructure boom to the risk of tighter credit conditions.
Though many others on Wall Street argue that bubble concerns are overblown. They point to growing AI demand from global enterprises and governments, as well as tech stock valuations that are still modest compared to the Dotcom era.
What Walmart Deal Could Mean for OpenAI
OpenAI has forecast it will burn through more than $100 billion before reaching profitability around the turn of the decade. As a result, the start-up is expected to be highly reliant on debt and equity markets to fund the commitments it’s made to Oracle, AMD, Broadcom, and others.
A successful partnership with a massive retailer such as Walmart could boost OpenAI’s revenue growth, allowing it to take on less debt.
The partnership could also convince other retailers to strike similar deals and integrate their online shops with ChatGPT to reach the chatbot’s more than 800 million weekly users.
With Tuesday’s stock move, “[Walmart’s] multiple has moved up in anticipation of faster future growth and margins. We agree with this premise,” wrote Morgan Stanley analysts in a note this week. They forecast the partnership could increase Walmart’s EBIT margin by as much as 40%, an improvement that would likely make a strong case for other retailers to follow suit.