The AI debt dilemma hits Big Tech earnings
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Illustration: Aïda Amer/Axios
Wall Street is raising concerns about Big Tech companies using debt to fund their AI ambitions. That was evident as Meta tumbled 11% on Thursday after it posted strong results but increased capital spending plans.
Why it matters: Investors may not be willing to put up with the expense of an AI buildout forever, which could push some companies toward off-balance sheet financing methods that are harder to keep track of.
Between the lines: Not all AI debt is created equal, Gil Luria, managing director at the investment firm D.A. Davidson, tells Axios.
- Microsoft's fortress balance sheet and strong management makes higher capex a bullish signal, he says, as it indicates strong demand for AI.
- That's not the case, however, across the technology sector. Some companies are taking on debt to fund demand that isn't there yet.
Zoom in: Take Oracle, whose debt is expected to double to more than $290 billion by fiscal 2028, according to Morgan Stanley.
- There is an overbuild risk, and that kind of speculation is better financed through equity than debt, Luria says. This is a similar dynamic at the likes of CoreWeave, Crusoe and others, he adds.
- There is also no clear end in sight. With every new Nvidia chip, AI players must spend more to upgrade if they want a chance at competing, making it unclear when this record spending spree can start to slow down.
Reality check: If you think the AI buildout will pay off, then financing it with debt makes sense.
- Big Tech firms don't want too much of this debt on their balance sheets since it could weigh on investor sentiment and their stellar credit ratings.
- This debt is easier to finance over time given the lack of clarity around the return on AI investment. Luria thinks the AI narrative could turn out well.
What to watch: Whether AI can generate enough productivity and revenue to justify these massive capital investments.
- Luria cautions that if these debt levels surge and companies run into trouble amid lackluster demand, that could create systemic risks he compares to the global financial crisis.
