Walmart stock hits record highs on OpenAI deal. What message does this send about AI businesses?

The OpenAI fairy dust that has boosted tech stocks this year is spreading into new sectors.

ChatGPT users will soon be able to have a chatbot shop at Walmart without leaving the app, OpenAI and Walmart announced Tuesday. “Whether planning meals, restocking household essentials, or finding something new, customers can simply chat and purchase, and Walmart will do the rest,” Walmart said in a statement.

Walmart (WMT) stock soared following the announcement, rising nearly 5% on Tuesday, its best day since early April. Stocks rose another 2% on Wednesday to close at a record high and the Dow Jones Industrial Average rose for a second straight day. The stock fell on Thursday.

For OpenAI – which has been at the center of recent deal-making and which has raised concerns about a potential AI bubble – the partnership with the world’s largest retailer represents an important step in its efforts to prove commercial viability. Although the terms of the deal were not disclosed, OpenAI will likely receive a commission from sales made on its platform, which may reassure some market watchers concerned about OpenAI’s ability to generate revenue and reduce its debt burden.

OpenAI addresses fuel spikes and bubble concerns

Walmart is the latest company to have its shares skyrocket after announcing a partnership with the world’s most valuable private startup. Broadcom (AVGO) shares rose nearly 10% on Monday after it signed a deal with OpenAI to co-develop and deploy custom AI systems. Advanced Micro Devices (AMD) signed a similar deal with the company last week, and its stock rose nearly 25%. Even just a simple hello at the OpenAI Developer Conference is enough to lift the stock.

OpenAI’s recent deal-making boom has sustained the latest phase of a nearly three-year bull market fueled by the big tech and AI boom. But it has also raised red flags on Wall Street, where some worry about the circularity of deals that underpin lofty stock valuations.

More than half of global fund managers surveyed by Bank of America in early October said they believed AI was in a bubble, and a third of them viewed an AI bubble as the biggest risk to the stock market, more so than inflation (27%) and challenges to the Fed’s independence (14%).

Those who worry 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 dot-com bubble in 2000. They also note that AI data center build-out, which has been mostly funded by the technologies’ healthy cash flows Large economies are increasingly financed with debt, putting the infrastructure boom at risk. From tightening credit conditions.

Although many others on Wall Street claim that fears about a bubble are overblown. They point to growing demand for artificial intelligence from global companies and governments, as well as technology stock valuations that remain modest compared to the dot-com era.

What could a Walmart deal mean for OpenAI?

OpenAI predicted it would spend more than $100 billion before reaching profitability at the turn of the decade. As a result, the startup is expected to rely heavily on debt and equity markets to fund the commitments it has made to Oracle, AMD, Broadcom and others.

A successful partnership with a mega retailer like 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 stores with ChatGPT to reach the chatbot’s more than 800 million weekly users.

As the stock moved on Tuesday,[Walmart’s] Business surged in anticipation of faster growth and margins in the future. “We agree with this hypothesis,” Morgan Stanley analysts wrote in a note this week, and they expect the partnership to increase Walmart’s EBIT margin by as much as 40%, an improvement that would make a strong case for other retailers to follow suit.