AI spending threatens credit quality of Amazon, Meta, Alphabet
Nasdaq showcases 7 great tech stocks.
Adam Jeffery | CNBC
The race to build trillion-dollar-a-year AI infrastructure is eroding free cash flow and increasing balance sheet risk at so-called hyperscalers, Moody’s Ratings has warned.
In a study Notes The increase in spending is straining even the world’s most cash-rich companies, Moody’s said in a report released this week. Alphabet And Microsoft Turning heavily to debt, equity sales and off-balance sheet transactions to finance AI goals.
“Previously, these companies relied on asset-light structures focused on software, intellectual property and scalable cloud services that required modest capital investment,” Moody’s said in a note Wednesday. he said. “The transition from asset-light to asset-heavy models requires unprecedented levels of investment and capital raising.”
The moves “threaten credit quality” for six companies tracked by Moody’s, including Microsoft. Amazonalphabet, Meta, Seer And CoreWeave, according to the report.
The ratings firm predicts that capital expenditures (or capex, which is investment in physical assets such as data centers) will reach $785 billion in 2026 and reach nearly $1 trillion next year.
This shift disrupts the decades-old Silicon Valley formula that has created the world’s most valuable companies. The software costs little to copy, ensuring high profit margins and solid balance sheets. Generative AI, by contrast, requires a huge physical footprint: expensive and energy-hungry servers and warehouses full of chips.
To finance expansion, tech giants are increasingly turning to Wall Street, causing financial sector profits to soar.
Direct debt for the six hyperscalers has reached nearly $460 billion, according to Moody’s. Technology companies are also pulling cash from public markets, including Google parent Alphabet, which reported $85 billion in revenue last month. share sale.
Rental of data centers
The ratings firm noted that free cash flow in the sector has come under pressure as AI hardware and infrastructure requires large up-front investment and revenue is realized over a longer time frame.
To keep direct liabilities off their balance sheets, hyperscalers are turning to off-balance sheet financing, mostly through long-term data center leases, the report said.
Moody’s said lease commitments across the group had risen to $1.2 trillion. More than $820 billion of that total comes from leases that have not yet started; This means data centers are still being built.
While these obligations are not considered traditional debt, Moody’s says it views them as debt-equivalent obligations that will force companies to pay significant rent payments in the future.
Despite the warning, Moody’s said Microsoft, Alphabet, Amazon and Meta have among the strongest corporate balance sheets in the world, making their investment grade ratings unlikely to be under imminent threat.
Immediate pressure is focused on lower-rated organizations such as Oracle and specialist AI cloud provider CoreWeave. Oracle carries a Baa2 rating with a negative outlook, placing it just two notches above junk status.
CoreWeave, meanwhile, operates in the high-yield market with a Ba3 rating, relying on complex private debt structures to fund fleets of GPU hardware.
circular ecosystem
Moody’s also noted the structural cyclicality in the AI boom. Moody’s noted that some of the multibillion-dollar backlog reported by hyperscalers stemmed from strategic deals with pre-IPO AI labs including OpenAI and Anthropic.
Companies have invested billions of dollars in AI labs, which in turn have spent heavily on the same companies’ cloud computing, creating what Moody’s describes as a circular AI ecosystem.
Moody’s said overlapping relationships increase risks because many of the industry’s largest companies are increasingly reliant on the same AI customers and the same assumptions about future demand.
Still, tech giants have significant power to help offset these risks.
Demand for AI computing remains strong, cloud businesses continue to grow, and hyperscalers have signed long-term customer contracts worth hundreds of billions of dollars that will provide predictable revenue. These deals underpin the sector’s largely strong credit profiles, even amid a spending boom.
Still, investors should recognize that the financial profile of the technology sector is undergoing unprecedented structural change in the cloud era, according to Moody’s.
“Investors will increasingly focus on the ability of these companies to generate adequate investment returns,” the ratings firm said.
