Big Tech’s debt frenzy risks AI world creation
Equity investors are expressing heightened concern regarding the level of leverage that Big Tech is utilizing to expand its artificial intelligence infrastructure, amid escalating apprehensions about a potential bubble in the industry. The substantial investments that major technology companies are making in AI are not unprecedented; however, the unprecedented levels of debt they are accumulating to finance these endeavors are indeed noteworthy. What concerns stock traders is that the trend signifies a departure from recent history, during which companies utilized their substantial cash reserves to finance their capital expenditures. The application of leverage and the cyclical characteristics of numerous financing arrangements brings forth a degree of risk that previously did not exist. “I view this as the AI story maturing and entering a new phase, one that is likely to be marked by more volatility and additional risk,” said Lisa Shalett. US stocks were poised for yet another volatile trading day on Friday, as both S&P 500 and Nasdaq 100 futures fluctuated between gains and losses. Nvidia Corp. shares experienced a decline of up to 3.4% in premarket trading, poised to extend losses exceeding 3% from the previous session. US equities are on track for their largest weekly decline since April, following Thursday’s significant intraday reversal.
Only a few months back, the investment in AI was largely driven by a select group of companies boasting solid balance sheets and significant growth in free cash flow. The landscape has shifted, and with it, the risk profile of the tech industry has evolved. The new dynamic was evident Thursday, as tech stocks fluctuated dramatically following Nvidia’s strong earnings, only to decline as investors evaluated the capital needed to support an AI-driven future in relation to the profitability timelines of those investments. “We’ve seen an expansion of the ecosystem to include companies with weaker balance sheets like Oracle and CoreWeave, more debt, and we’ve also seen more interlocking and circular revenue relationships,” Shalett stated. “That interconnectivity between the players brings systemic risk.” Valuations among the major tech companies have also adjusted due to investor apprehension. The forward 12-month price-to-earnings ratio of the Bloomberg Magnificent 7 Index has decreased to its lowest level in over two months and is currently trading in accordance with its average from the past five years. The five major spenders on AI — Amazon.com Inc., Alphabet Inc., Microsoft Corp., Meta Platforms Inc., and Oracle Corp. — have raised a record $108 billion in debt combined in 2025, more than three times the average over the previous nine years, according to data compiled by Bloomberg Intelligence.
Oracle’s offerings have faced significant examination. The stock experienced a significant increase in September following the company’s sale of $18 billion in US investment-grade bonds aimed at enhancing its AI expenditures, while banks initiated a $38 billion debt offering to finance data centers associated with Oracle. Since reaching a record high on September 10, the shares have experienced a significant decline of 33% as investors reevaluate the impact of the company’s aggressive capital expenditures on its balance sheet and the methods it employs to finance these substantial investments. Five-year credit default swaps on Oracle, indicating leverage risk, have surged to their highest level in three years. “To see Oracle’s CDS go up shouldn’t be surprising,” remarked Arnim Holzer. “These companies are investing massive amounts and committing to massive amounts of capex, some of which will be financed with debt.” This does not imply that Oracle’s stock is worthless; rather, it ought to exhibit greater volatility. Oracle has projected $35 billion in capital expenditures for its current fiscal year, with a significant portion allocated to its cloud business. The company’s balance sheet is feeling the impact of the spending, with free cash flow projected to be negative $9.7 billion this year, following a decline into the red last year for the first time since 1990. The deficit is anticipated to grow in the next two fiscal years, hitting negative $24.3 billion in fiscal 2028. S&P Global Ratings has recently updated its outlook on Oracle to negative, citing “its strained credit profile from anticipated capex and debt issuance to fund accelerating AI infrastructure growth,” according to a note.
However, the credit binge extends beyond just Oracle. According to sources, Meta has issued bonds totaling $30 billion, Alphabet has sold $38 billion, and Amazon.com Inc. has raised $15 billion. “We might just be in the beginning stages of an AI capex buildout, but that sort of also implies we’re probably in the early stages of releveraging balance sheets,” stated Robert Schiffman. “I would be concerned that this surge in issuance is likely just the beginning of what we can expect in the coming years.” Until recently, capital expenditure was regarded as an essential component of engaging in artificial intelligence. Some investors perceived it as a favorable indication of confidence exhibited by the companies. However, it is facing heightened examination as Wall Street professionals seek more robust returns on their investments. Incorporating debt into the equation only intensifies that concern. “When companies that don’t need to borrow are borrowing to make investments, that sets a bar for the returns on those investments,” said Bob Savage. “We’re in a ‘show me the money’ phase.” Despite the increased leverage, investors continue to express a generally positive outlook on megacap tech stocks, citing their durable earnings growth and strong competitive positions. Furthermore, UBS estimates indicate that approximately 80% to 90% of the planned capital expenditures from major tech companies are derived from their cash flows. “It seems a little overblown to say that these offerings are a major turning point and that the AI hype bubble will be burst,” Savage said. “The debt could complicate the story, but I don’t think it changes the thesis.”
