Debt of major tech companies hits $1.35 trillion, largely owed to AI gold rush
The so-called A.I. bubble has ballooned into a monster that may be primed to pop.
A recent report from QUICK FactSet claims that interest-bearing debt of the 1300 largest tech companies in the world has quadrupled over the past 10 years, according to Nikkei Asia. This puts outstanding loans, bonds, and other debts at roughly $1.35 trillion.
The primary reason for this massive growth in debt is thought to be rooted in the artificial intelligence, or AI, race. As companies continue to compete with each other to fill the perceived growing demand for AI services and, subsequently, the expensive hardware and infrastructure needed for them.
Some companies seem to be heavily leveraged. Oracle, which has pledged a $500 billion investment in building out AI infrastructure with OpenAI over the next four years, now owes over $111 billion in debts. This is more than twice as much debt as the company had a decade ago. As a result, Oracle's debt-to-equity ratio (DTE) now stands at 4.6, meaning the company owes 4.6 times as much money as it has in shareholder equity (the value of all assets if they were sold and returned to shareholders).
A changing business model spreads increased risk
This new debt stands in stark contrast to the tech business landscape a decade ago; tech companies then relied heavily on software assets, which tended to generate tidy profits. The new push into AI and its resultant need for physical infrastructure has largely eaten up any potential profits from AI-driven tech companies for now. In other words, companies that are going all in on AI are, by and large, not yet profitable. Instead, they owe quite a bit of money while their revenues cannot yet make up that deficit.
This debt strategy not only affects companies developing AI but also those that are tangentially related. For example, Nikkei reports that Nvidia is "preferentially supplying [CoreWeave] with graphics processing units." CoreWeave provides cloud-based AI services and requires high-powered silicon to operate its business. The company is borrowing quite a bit of money to do this and currently has a DTE ratio of 3.8, putting both it and Nvidia at risk of a significant financial loss should the company fail. Without the revenues from CoreWeave, Nvidia's business would take a noticeable hit.
Yoshinori Shigemi of Fidelity International, as quoted by Nikkei, thinks that this business model could cause major issues in the tech sector. Shigemi said:
Companies are aggressively making upfront investments to avoid being left behind in the AI boom. Funding is flowing smoothly for now, but if a bottleneck occurs somewhere, financially weak companies could be eliminated.
Running a company on leverage tends to be a high-risk, high-reward strategy. Time will tell (and likely sooner rather than later) which side of that gamble the tech industry falls on.
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