The AI boom is being glued together by vast contracts that could peel apart the moment demand gets soggy.
According to the Wall Street Journal deals to supply computing power for artificial intelligence have become the commercial grout of the current craze. Suppliers claim these contracts give them glittering visibility on future revenue, which investors seem happy to swallow.
The computer-memory business is the most obvious example. Memory suppliers and customers have been chasing longer-dated deals as AI agents gobble up ever more memory. That shift is turning a brutal, cyclical market, usually ruled by price wars, into something that looks steadier on the surface. It is a tidy story, provided the boom keeps behaving itself.
Samsung Electronics, SK Hynix and US-based Micron are raking in record profits and claiming the supply squeeze could last into 2028. An SK Hynix executive told analysts in April that long-term deals could improve market perceptions of the memory business.
Micron has been especially busy with its five-year “strategic customer agreements”, which are typically take-or-pay. Micron chief executive Sanjay Mehrotra said last month these deals would supply more than half the company’s revenue in the years ahead.
The cocaine-nose jobs of Wall Street have loved the wheeze. Micron’s stock has roughly tripled this year, SK Hynix has risen nearly as much and Samsung has about doubled.
The problem is that long-term contracts look much less solid when demand goes off for a lie down. If demand for memory fades before the contracts expire, those deals will probably be renegotiated or extended.
Chip suppliers do not fancy shipping products to customers who will not use them. Those chips would sit in inventory until demand returns, then customers would draw down stock before buying new gear. Suppliers are not keen to ram unwanted parts down customers’ throats, especially when rivals are acting more flexibly. That sort of behaviour can knacker long-term relationships.
The Covid-era chip shortage offers a handy reminder. Chipmakers used longer contracts to fund capacity expansions and decide which customers deserved the nice table by the window.
Microchip launched a “preferred supplier program” in 2021 for microcontroller chips used in cars and electronics. When shortage turned into glut, exemptions appeared and Microchip Technology chief Steve Sanghi was blunt: “We’re not forcing customers to buy anything that they do not need.”
The same pattern could hit the AI supply chain if the boom weakens. AI developers have contracts with Oracle and CoreWeave, which then have contracts for AI computing gear.
Those AI chip suppliers rely on TSMC to make the chips, while TSMC has long-term equipment contracts with Netherlands-based ASML. Oracle signed a huge cloud deal with OpenAI and reported $638 billion in remaining performance obligations, which are contracts it has not yet delivered.
Oracle finance chief Hilary Maxson told analysts last month the figure “provides exceptional visibility into our future revenue growth, all supported by long-term contractual customer commitments.” The Bank for International Settlements warned this month that shortages may be amplifying overinvestment “as firms attempt to lock in future capacity through long-dated contracts that further expose them to any disappointments in demand.”
