Pentagon Gives Anthropic Ultimatum in AI Use Clash

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Alex Ossola (0:33)

The Pentagon gives Anthropic and Ultimatum in their spat over use of the company's AI tools. Plus, US stocks rise after Meta and AMD announce a $100 billion chip deal.

Robbie Whelan (0:45)

It might feel sort of circular because it is, but we're still in the stage of the AI boom right now where every one of these big deals is such a big headline and it's so exciting for investors that investors just bid up the stocks of the companies that are doing them.

Alex Ossola (0:57)

And what lawmakers are doing to address the housing affordability crisis. It's Tuesday, February 24th. I'm Alex Ossola for the Wall Street Journal. This is the PM Edition of What's News, the top headlines and business stories that move the world today.

A meeting today between Defense Secretary Pete Hegseth and Anthropic CEO Dario Amodei ended in an ultimatum. Anthropic has until Friday to comply with the Pentagon's demands on using its artificial intelligence models, or the company's contract will be canceled. That's according to people familiar with the matter. The people said that if Anthropic doesn't show more flexibility working with the military, Hegseth said that he could label the company a supply chain risk, a move typically reserved for overseas companies linked to foreign adversaries. Or, he said he could invoke the Defense Production Act to essentially force the company to work more collaboratively with the Pentagon. Experts have said that either move would be nearly unprecedented. The meeting comes after a recent feud between the Pentagon and Anthropic. Hegseth wants the military to be able to use Anthropic's CLAWD and other AI tools in all lawful use cases, including domestic surveillance and autonomous lethal activities. A move the company has resisted. In other AI news, Meta has agreed to buy 6 gigawatts worth of artificial intelligence computing power from advanced micro devices. The deal is valued at more than $100 billion and could result in Meta owning as much as 10% of AMD's stock. For more about the deal, I'm joined now by Robbie Whelan, who covers semiconductors for the Journal. Robbie, AMD's stock was up 8.8% today, while Meta's rose just 0.3%. Why are investors betting this is such a big deal for AMD?

Robbie Whelan (2:41)

Well, the context here is that AMD is really an upstart when it comes to the chip industry. There's one big dog in this industry that's Nvidia. They control somewhere around 85 or 90% of the market for GPUs, which are the really in-demand chips that power AI computing.

And what we've seen, especially over the last six months, is that every time one of these semiconductor companies, like Nvidia or AMD, does a deal where they sign up a new big customer or expand an existing customer relationship, their stock just jumps like crazy. These companies have learned that they can do these kind of novel financing approaches when they do these deals. We've got AMD offering warrants on about 10% of its stock to Meta, 160 million shares of AMD stock. In this case, it's one cent per share of stock. Similar to an option, it's basically a contract that says, you're going to get a good deal on our stock. So in other words, Meta is agreeing to buy a ton of chips from AMD. AMD is giving Meta money in the form of stock warrants. And it might feel sort of circular because it is. But we're still in the stage of the AI boom right now, where every one of these big deals is such a big headline. And it's so exciting for investors that investors just bid up the stocks of the companies that are doing them.

Alex Ossola (3:57)

Are there any downsides to that kind of structure of a deal?

Robbie Whelan (4:00)

Well, there's kind of like a conceptual cognitive dissonance here, which is that if truly there is insatiable demand for AI computing, one would think you wouldn't need to kind of pay these customers to incentivize them to buy your chips. You would think they would just come to you and buy them with cash or with debt. But a lot of the companies in this space are still, for better or for worse, startups. Not public, doesn't have an investment-grade credit rating. It's not so easy for them to finance these deals themselves. So they rely on their suppliers to help with the financing. That's great for them. But what it does on the other side of the equation is that it makes people look at these deals in a sort of circumspect way and think, well, if the demand there is not totally organic, then does that mean that we're in a bubble? So every time one of these deals happens, the chip companies prosper and their stocks go up.