AI Spending Boom: Are Big Tech Companies Taking on Too Much Debt?

During their recent episode of the Value Options Podcast, Travis and Carlisle discussed AI Spending Boom: Are Big Tech Companies Taking on Too Much Debt? Here's an excerpt from the episode:

[Tim] Yeah, it’s interesting because the financing was really done by their operating cash flows for quite some time. That’s historically how they’ve been able to do it. They’ve also been able to buy back stock because they are such prodigious cash flow machines.

But because the capex expenditures are so large, we’re talking hundreds and hundreds of billions of dollars, the debt markets have gotten a lot more expensive. Long-term Meta bonds or Oracle bonds might be 7% or 9% for Oracle. And then a company like Corweave is financing itself at 15% in the debt markets.

They’ve definitely been maxing out their debt capacities. They’ve been doing a lot of off-balance sheet financing vehicles, which are a whole other matter. And then now, Google did it a while ago when Berkshire bought into Google at about $330 when they did their large equity offering earlier in the year.

And Meta now is raising a lot of money. I think it’s going to be close to $100 billion, if not more, when it’s all said and done between this year and next year in equity. And so I think you have the stocks selling off a bit because they know that to finance this capex, it’s coming to equity now.

It’s not going to be just operating cash flow. It’s not going to be just debt. So the valuations, I think, are getting pretty interesting if you’re bullish on that capex ROIC.

[Tobias] And what do you think?

[Tim] I like them. I like most of them. I really do.

I think that Amazon’s very compelling at the current valuations. Meta, very compelling. I think that they have a big, huge hit on Muse.

I use it for personal stuff and I think it’s quite handy. I could totally see it being adopted by older users of Facebook and Instagram that might not be as comfortable and familiar with some of the other AI platforms. I just think that with their distribution network, they can get it out to a lot of people.

So I really like Meta’s position. And I think Google’s interesting. There’s definitely headwinds, Toby.

For instance, Muse, when it shops, Amazon didn’t give it access to the Amazon website. So if you shop on something on Muse, what was I looking for? I was looking for Halloween costumes for my daughter.

And it did all the other things except for Amazon. And for me, probably like you, I buy a lot of stuff on Amazon. It’s just so much more practical.

They have your financial information. You know you’re going to get it most likely. So they’re doing that.

I wonder how some of these AI things are going to impact Google search. Obviously, this has been a theme for quite some time. But that’s Google’s beast, along with YouTube and stuff like that.

So you could see that it disrupts positions potentially, but they’re still so strong. They’re leaders and they’re able to invest the most. And that’s they’re investing the most because they have to protect that competitive position.

[Tobias] Yeah. It’s going to be interesting when they all have to compete with each other. Still, I guess Amazon will always have the shopping.

Facebook and Google are all going to get a lot closer together. And I think they compete more directly with OpenAI and Anthropic. It’s kind of interesting.

I think some of the stocks that have been big winners through this, Micron and SK Hynix and those kinds of names. The question is, are these cyclical as they have traditionally been in the past, where at the top of their cycle, they look cheap and at the bottom of their cycle, they look expensive. And so conversely, you want to be buying them when they look expensive and avoiding them when they look cheap.

So they’re over-earning at the moment. Or if they’re cyclical, they’re over-earning, trading on a reasonably modest multiple. So perhaps not a good time to buy them.