Why the Big Tech's "circular funding" for AI could be the new business normal
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Circular funding is all the rage among the largest tech companies powering the S&P 500. The question is whether that could be a problem, or just a new name for an old and proven way of doing business.
The big picture: Nvidia, Microsoft, Amazon and Meta are among the Big Tech firms that have poured billions of dollars into AI startups. The startups in turn spend those funds on chips and cloud services from their investors.
- That funding cycle blurs the line between genuine growth driven by demand versus artificial growth fueled by circular financing.
What they're saying: "That's the nature of business," Max Kettner, the chief multi-asset strategist at HSBC, tells Axios, rebuffing concerns over how the largest tech firms are all seemingly passing money back and forth.
- Kettner notes that other companies have spent money on businesses that are also their customers for years, and investors never called that kind of business-to-business spending circular. He gives the example of Walmart spending on suppliers who are also customers for the major retailer.
Zoom in: Circular financing may become a risk only for smaller AI startups, says Ayako Yoshioka, portfolio consulting director at Wealth Enhancement.
- "I'm not worried about Meta…Google…Microsoft…I am worried about the mismatch in financing…with these sort of smaller hyperscalers," Yoshioka tells Axios.
- These smaller startups are putting out record capital to fund data center builds without the cash flow to back it up, Yoshioka says, leaving them potentially at higher risk of any spending slowdown from their biggest customers.
Threat level: An AI spending spree, without demand from consumers to drive returns, could lead to a dropoff in AI capital spending. If the largest companies stop paying each other, they could hurt each other's earnings.
- "Is there a risk that down the road those AI capex turn out to be too much…Sure," Kettner says, but he sees that as a problem that won't materialize over the next six to 12 months.
Between the lines: Kettner cautions that investors will miss out on unrealized gains if they cash out due to circular funding concerns.
- "It's not like companies are dreaming of building that technology, or dreaming of building data centers. They're physically there," he says.
- If anything, he concedes — alongside several other strategists — that the real problem could involve an overbuild of AI infrastructure.
The bottom line: Even if the AI buildout proves to be excessive and circular, market participants are eager to keep riding the AI rollercoaster to the top.
- They'll worry about the subsequent drop later.
