Big tech's hidden debt problem

Good morning,

A Japanese company launched a “human refrigerator.” It’s much less chilling than it sounds: the fridge is designed to help people cool down during the sweltering summer.

In today’s letter:

• A credit warning for Big Tech
• The AI efficiency gap is costing you
• Wall Street’s Super Bowl week

As tech earnings near, focus is shifting to hidden (and not-so-hidden) AI debt

The MAAM Four… Microsoft, Apple, Amazon, and Meta are set to report this week at a charged moment for the tech industry. Gargantuan AI capex commitments, surging debt obligations, and circular deals have increasingly been making investors sweat. If Google’s Q2 earnings are any indication, we might see more of the same this week.

• Google went free cash flow negative and its shares fell 6% on Thursday after it raised its annual capex guidance to between $195B and $205B. The selling came despite a handy earnings beat and impressive 82% cloud revenue growth, which the company attributed to AI demand.
• Adding to the tech tension: Chip stocks dropped yesterday after The Wall Street Journal reported that Nvidia is in talks to provide a ~$250B financing backstop for OpenAI as part of a data center project. This stoked concerns about circular financing (e.g. suppliers being major investors in their customers).

A foreboding Mood(y’s)... In a new research note, credit ratings agency Moody’s said the AI data center boom is driving “unprecedented” levels of investment and capital-raising that threaten hyperscalers’ credit quality. Moody’s warned that the AI buildout is eroding free cash flow and raising balance-sheet risk at Google, Microsoft, Amazon, Meta, Oracle, and CoreWeave (Apple has largely stayed out of the AI capex splurging cycle).

As we highlighted in June, the scale of spending means that even the most cash-flush companies have to rely on outside capital from stock sales and bond offerings to fund AI infrastructure. But there’s something perhaps more concerning:

• Hidden debt: Hyperscalers are turning to quiet off-balance sheet financing with long-term data center leases that don’t show up as traditional debt. Moody’s considers these as debt-equivalents that lock companies into big future payments.
• $1.2 trillion: The value of lease commitments across the six hyperscalers, according to Moody’s estimates. $820B of that is from leases for data centers that haven’t been completed yet.

Still, Moody’s said Microsoft, Alphabet, Amazon, and Meta have some of the strongest corporate balance sheets, making rating downgrades unlikely any time soon.

The bottom line:

The gold rush is starting to look like a debt rush… This week’s earnings will show whether Big Tech can keep selling investors on future AI demand, or whether debt (both on and off the balance sheet) is becoming the main story. Tech giants say demand for computing power far outstrips available supply. As long as that stays true, the risk posed by these massive data center buildouts can be justified.

The silent but costly AI efficiency gap

Two companies can do the same work and pay wildly different prices for it. Ramp data shows the median company spends $3.54K a month on AI — but the gap between an efficient team and a wasteful one is more than 4x per token.

What does efficient AI spending look like, and how do you get there?

See the data insights from 1,500+ businesses.

The stock market Super Bowl

We’re in peak-summer, but there’s no R&R for Wall Street this week. On deck: an interest rate decision, economic prints, and the busiest earnings stretch of the season.

In addition to Big Tech, we’ve got Big Oil, with Exxon and Chevron unloading their numbers on Friday. The gas giants are expected to report strong earnings and revenue growth, boosted by soaring crude and fuel prices from Middle East supply disruptions.

As for the Fed’s rate decision tomorrow, traders are pricing in a 38% chance of a 25 bps hike. Thursday’s PCE, the Fed’s favorite inflation gauge, will shed more light on future moves.

Signals Shortlist

• Citadel Securities sees Warsh delivering surprise Fed rate hike (Bloomberg)
• Intel stock falls nearly 8% despite blowout Q2 earnings beat (Yahoo Finance)
• Logistics giants like FedEx rush to keep up with GLP-1 boom (CNBC)
• Nvidia, Microsoft and other tech giants back open-source AI models (Reuters)
• Inflation forces Americans to rewire their grocery shopping routines (AP)
• OpenAI cyber models broke out of training environment to hack Hugging Face (CNBC)

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