The NVIDIA case is such a strange example to use to make the argument the author is trying to make.
NVIDIA raised $25 billion and had $85 billion in orders. Because of the demand, it was able to upsize its offering and issue bonds in maturities ranging from 2 to 30 years at quite favorable interest rates. The amount raised is a quarter of a year's free cash flow and the spread tightened during the book building process, so bond investors obviously aren't on the same page as the author.
You really can't make a bearish argument about the amounts being raised without putting the numbers in perspective. Yes, the issuances are big, but the equity and cashflows are also big, so the amounts being raised in the bond market don't really align to the author's skepticism when it comes to NVIDIA, Google, Meta.
The author would have a stronger case with Oracle but that alone wouldn't support the "Big Tech" story line.
Edit: $25 billion is a quarter's worth of free cash flow for NVIDIA, not half a year's as I originally stated.
What are you assuming the author case is? The article points out that by normal logic these companies are overvalued and so owning their stock is risky. Now that they've taken on all this debt, it's even riskier.
The words "valuation" and "overvalued" appear exactly 0 times in the post. The author didn't make the argument you're claiming.
Actually I misspoke in my original comment. NVIDIA has about $100 billion/year of free cash flow. So $25 billion is a quarter's free cash flow, not a half a year's.
$25 billion of debt against a $5+ trillion equity value and ~$100 billion of annual free cash flow barely moves the needle on equity beta or default risk.
The reason it is so noteworthy is because these companies are based upon valuations which assume mostly debt free companies with giant free cash flows. If Google starts to look like Ford a lot of the assumptions around why it’s worth so much money go out the window. Of course we’re not there but this is a change in direction which is new and noteworthy.
Debt is directly tied with the ability to repay it, if the cash flow is enough to keep paying it, it's not a big issue, but thing can go horribly pretty fast if someone start having cash problems.
500B on software would be a lot. On infrastructure, it really isnt.
We spent this much (without adjusting for inflation), in 5-10 years on telecom build out in the lead up to the dot com crash. I'm fairly sure that there is still leftover capacity in the ground (dark fiber) today that we can leverage.
Smell like a bubble yet?
Looking back to that pre 2000's era, SUN was running on 50% margins, Cisco at 68%
For as much fun as the dot com bubble was, for as hard as the pop was, what came after was MUCH better. This burst is going to be brutal, and the sooner it happens the sooner we can move on to actual (sane) innovation, that leverages this build out.
>the sooner it happens the sooner we can move on to actual (sane) innovation, that leverages this build out.
Unlike dark fiber which retained value, GPUs and compute hardware rapidly becomes obsolete. It won't make sense to use anything more than 4 years old, as performance and especially energy efficiency will have improved in that time.
I wouldn't count on getting significant value out of the debris of the coming data center implosion.
Copper thieves are likely the only ones who might, but there will likely be a glut and the risk likely won't be worth it for even them.
If you mean that taking out any kind of debt is fundamentally a bet that whatever is being put up as collateral will grow faster than the interest rate? Because if it doesn't the risk that suddenly debt holders control you grows by a lot. Yes, absolutely.
So, applied to GOOG, Alphabet Management is betting they will grow more than 4.5% per year at least until 2030.
There is also some weirdness, like Alphabet making a 500 million USD bet short term USD interest rates will be lower than 4% over the 2025-2028 period.
How do these AI companies turn profitable on a short enough timescale for that to make sense? Suppose a step change AI model comes out tomorrow with good enough reasoning to basically replace an employee. Businesses need to retool workflows and processes to accommodate, even if it's better. This is years away, not months. There's not enough market for the compute. And that all assumes science fiction level results, which there is absolutely no indication they will achieve.
Also, if you have expectations that future inflation may be high, the leverage of borrowing can make sense as a hedge against your cash equivalent holdings in that scenario.
But money has not been cheap for a while now so this is interesting. And yes, if you can do something more profitable with it, borrowing is always smart no, regardless of how cheap it is?
The current tech frontier requires capital expenditures on a scale they've been systematically avoiding for 25 years because pure software was easy money. The interesting thing is how they're all trading paper amongst themselves with made up valuations and what blows up when the music stops.
Literally doesnt matter. The baseline for tech is the zirp era of 2010s. Over time borrowing costs and rates have gone up. The ecosystem was very different pre zirp era and comparing is kind of pointless.
Yeah, that does look pretty low quality and doesn’t really make sense. However from what I understand it is expected for rates to increase by end of the year
Financially? Sure. Politically? Not a chance, they'll get bailed out or partially nationalized.
Frontier labs will be considered essential to national security, Microsoft is basically a public utility at this point, Facebook is too important for the spread of propaganda (although this one has less of a case/justification for a government bailout), Amazon (via AWS) runs massive parts of the federal gov (along with Azure), Google dying would cause almost an immediate global depression (73% of mobiles run android, the massive ad network).
These companies are so entrenched in day to day operations and into the economy that they cannot fail without ushering in whats effectively dark ages 2.0
Yes, because of play services. Eventually the world would adapt, but the immediate effect is that nearly every major commercial app that is increasingly requiring play integrity, play services will stop working. Push notifications will also break, as will the payment network. Google Pay, Apple Pay, Samsung Pay etc are essentially shadow banks now.
The real impact of Google going dark though is less Android and more ads. Google fails, the revenue pipeline for 2 million + websites goes to zero overnight, and millions of digial businesses and agencies will go bankrupt within weeks. It would completely collapse the business model of the modern internet.
And you did not notice how many things require Google Apps/Play Integrity? Heck, most people don't even know how to install apps without the Play Store.
Indeed. People forget how quickly and easily companies become too big too fail. The US government bailed out, took over, privatized (not just once) Iridium, just because they had satellites and Global Crossing, just because of fiber ownership.
After the bailouts of 2008, I think the only thing to fear is that the US government will fail first. As long as they can afford to keep big businesses going, they will. Whether things will get bad enough that the government can't afford to do that is an exercise to the reader.
I mean, we are approaching the point where the government can't afford to do that. Debt is near $40 trillion, and debt held by the public has recently just slightly tipped over 100% of the US GDP, so we are long past affordability.
Interest payments on US Debt are already $1T annually. If GDP stops growing faster than the interest rate on the debt, we're "cooked" as the kids say.
If we lose reserve currency status, we are equally screwed.
A big tech bailout isn't going to look like a big cash injection. It would look more like total asset seizure and nationalization of those companies.
If we didn't have food, you'd have a point. If factories weren't churning out more stuff than anyone knows what to do with - you'd have a point.
All this is is a bunch of incompetent, spoiled idiots in positions of power that will sooner or later have to make room for people who know what they're doing.
Nobody in this globalized economy is interested in things no longer working - even the incompetent idiots. All that has to happen is 60+ year old retards who thought they were going to move up the power ladder because 'seniority' will need to go fuck off and play golf and their children will need to go fuck off and work in lower middle management.
That's all.
Of course they spend billions every year telling you otherwise. Their other big lie is that we can't tax anyone or do anything because 'they will just leave' or 'China' or 'USSR' or 'terrorism' or some other bullshit. It's all bullshit, it's been bullshit and it will continue to be bullshit until you turn your brain on for 2 minutes and realize it's either retards in charge or not - the rest is talk.
US Government won’t fail. They can certainly just default on all debt and keep on going like many other countries. It will be a shitty country going forward, but not a failed one.
The best thing you can do is diversify assets to be prepared for that scenario, so you do not fall into the hell of a permanent underclass, in perpetual servitude.
I don't think the big companies will fail, but their stock prices could dramatically drop. I think newer smaller companies like OpenAI and Anthropic could easily fail, as well as a bunch of other AI start ups. Altogether it could make for some difficult financial times like in 2000 and 2008
Both of those companies were essentially expendable in terms of keeping the economy running. AOL didn't own any cell towers and Yahoo didn't have any Pentagon contracts.
The NVIDIA case is such a strange example to use to make the argument the author is trying to make.
NVIDIA raised $25 billion and had $85 billion in orders. Because of the demand, it was able to upsize its offering and issue bonds in maturities ranging from 2 to 30 years at quite favorable interest rates. The amount raised is a quarter of a year's free cash flow and the spread tightened during the book building process, so bond investors obviously aren't on the same page as the author.
You really can't make a bearish argument about the amounts being raised without putting the numbers in perspective. Yes, the issuances are big, but the equity and cashflows are also big, so the amounts being raised in the bond market don't really align to the author's skepticism when it comes to NVIDIA, Google, Meta.
The author would have a stronger case with Oracle but that alone wouldn't support the "Big Tech" story line.
Edit: $25 billion is a quarter's worth of free cash flow for NVIDIA, not half a year's as I originally stated.
What are you assuming the author case is? The article points out that by normal logic these companies are overvalued and so owning their stock is risky. Now that they've taken on all this debt, it's even riskier.
The words "valuation" and "overvalued" appear exactly 0 times in the post. The author didn't make the argument you're claiming.
Actually I misspoke in my original comment. NVIDIA has about $100 billion/year of free cash flow. So $25 billion is a quarter's free cash flow, not a half a year's.
$25 billion of debt against a $5+ trillion equity value and ~$100 billion of annual free cash flow barely moves the needle on equity beta or default risk.
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$500B is a lot of debt, it's comparable to the three largest car companies' debt.
It's still not super huge compared to the amount of debt in other industries, but I guess the thought is it's riskier?
The reason it is so noteworthy is because these companies are based upon valuations which assume mostly debt free companies with giant free cash flows. If Google starts to look like Ford a lot of the assumptions around why it’s worth so much money go out the window. Of course we’re not there but this is a change in direction which is new and noteworthy.
Debt is directly tied with the ability to repay it, if the cash flow is enough to keep paying it, it's not a big issue, but thing can go horribly pretty fast if someone start having cash problems.
500B on software would be a lot. On infrastructure, it really isnt.
We spent this much (without adjusting for inflation), in 5-10 years on telecom build out in the lead up to the dot com crash. I'm fairly sure that there is still leftover capacity in the ground (dark fiber) today that we can leverage.
Smell like a bubble yet?
Looking back to that pre 2000's era, SUN was running on 50% margins, Cisco at 68%
Nvidia, 70% (and MS openly admits that they have GPU's on shelves not making money: https://www.datacenterdynamics.com/en/news/microsoft-has-ai-... ) Micron (memory) 70%, SK Hynix (SSD's) 70%.
For as much fun as the dot com bubble was, for as hard as the pop was, what came after was MUCH better. This burst is going to be brutal, and the sooner it happens the sooner we can move on to actual (sane) innovation, that leverages this build out.
>the sooner it happens the sooner we can move on to actual (sane) innovation, that leverages this build out.
Unlike dark fiber which retained value, GPUs and compute hardware rapidly becomes obsolete. It won't make sense to use anything more than 4 years old, as performance and especially energy efficiency will have improved in that time.
I wouldn't count on getting significant value out of the debris of the coming data center implosion.
Copper thieves are likely the only ones who might, but there will likely be a glut and the risk likely won't be worth it for even them.
Certainly doesn't feel like the 90s bubble from main street USA. I'm not sure if that means a burst will be softer or much harder on the middle class.
Smart to borrow when money is cheap if you think you can do something more profitable with it.
If you’re profitable and can pay it back, it’s better than equity.
If there’s any financial risk then it may not be worth the potential loss of control.
Would depend on the yield on debt vs yield on equity (factoring in earnings growth rate)
If your company trades at 100x sales you should probably sell the equity.
It’s not just yield. Its debt gets paid first. And if you miss the interest payments the debt holders get the company.
If you mean that taking out any kind of debt is fundamentally a bet that whatever is being put up as collateral will grow faster than the interest rate? Because if it doesn't the risk that suddenly debt holders control you grows by a lot. Yes, absolutely.
So, applied to GOOG, Alphabet Management is betting they will grow more than 4.5% per year at least until 2030.
There is also some weirdness, like Alphabet making a 500 million USD bet short term USD interest rates will be lower than 4% over the 2025-2028 period.
How do these AI companies turn profitable on a short enough timescale for that to make sense? Suppose a step change AI model comes out tomorrow with good enough reasoning to basically replace an employee. Businesses need to retool workflows and processes to accommodate, even if it's better. This is years away, not months. There's not enough market for the compute. And that all assumes science fiction level results, which there is absolutely no indication they will achieve.
Also, if you have expectations that future inflation may be high, the leverage of borrowing can make sense as a hedge against your cash equivalent holdings in that scenario.
But money has not been cheap for a while now so this is interesting. And yes, if you can do something more profitable with it, borrowing is always smart no, regardless of how cheap it is?
The current tech frontier requires capital expenditures on a scale they've been systematically avoiding for 25 years because pure software was easy money. The interesting thing is how they're all trading paper amongst themselves with made up valuations and what blows up when the music stops.
It’s a matter of perspective. Cheaper to borrow today than in the years 1969-2005…
Literally doesnt matter. The baseline for tech is the zirp era of 2010s. Over time borrowing costs and rates have gone up. The ecosystem was very different pre zirp era and comparing is kind of pointless.
Put ot all on a heap on eletrically charged sand and light it on fire?
https://www.inc.com/fast-company-2/oracle-ai-boom-hidden-deb... goes into more detail about this same issue.
Full title: "Big Tech is borrowing like never before and the Fed just made that a lot more expensive"
Which is strange, because they did not in fact implement a big (or any) increase in the federal funds rate.
I also notice the article is "tagged" as if its title had been split on lowercase 's'es:
> Big tech i
> borrowing like never before and the fed ju
> T made that a lot more expen
This level of attention to detail does not exactly inspire confidence.
Yeah, that does look pretty low quality and doesn’t really make sense. However from what I understand it is expected for rates to increase by end of the year
And they are expanding money supply like crazy and not too long ago ended quantitative tightening.
“sit with” is way over used lately
> That is the part investors should sit with.
This sounds like AI (Claude).
The article has a lot of AI fingerprints, and reads like it was mostly AI written with a human editing round.
And now SpaceX, who is not at all in the same financial situation as Nvidia, wants to borrow money too:
https://www.reuters.com/business/media-telecom/spacex-banker...
Ofcourse xAI brought under SpaceX's umbrella has nothing to do with that.
Is it me? I feel like we are entering an era where it has become possible for one of the big companies to fail.
Financially? Sure. Politically? Not a chance, they'll get bailed out or partially nationalized.
Frontier labs will be considered essential to national security, Microsoft is basically a public utility at this point, Facebook is too important for the spread of propaganda (although this one has less of a case/justification for a government bailout), Amazon (via AWS) runs massive parts of the federal gov (along with Azure), Google dying would cause almost an immediate global depression (73% of mobiles run android, the massive ad network).
These companies are so entrenched in day to day operations and into the economy that they cannot fail without ushering in whats effectively dark ages 2.0
Is Google really a critical dependency for android? I've installed Lineage OS before which worked.
Yes, because of play services. Eventually the world would adapt, but the immediate effect is that nearly every major commercial app that is increasingly requiring play integrity, play services will stop working. Push notifications will also break, as will the payment network. Google Pay, Apple Pay, Samsung Pay etc are essentially shadow banks now.
The real impact of Google going dark though is less Android and more ads. Google fails, the revenue pipeline for 2 million + websites goes to zero overnight, and millions of digial businesses and agencies will go bankrupt within weeks. It would completely collapse the business model of the modern internet.
You almost make me hope, that the web can be saved.
We shouldn't be needing native apps at all to do things like banking. If it works in the browser on a laptop, why shouldn't it do so on a phone?
And you did not notice how many things require Google Apps/Play Integrity? Heck, most people don't even know how to install apps without the Play Store.
Indeed. People forget how quickly and easily companies become too big too fail. The US government bailed out, took over, privatized (not just once) Iridium, just because they had satellites and Global Crossing, just because of fiber ownership.
AI labs would be a lot worse. A lot.
After the bailouts of 2008, I think the only thing to fear is that the US government will fail first. As long as they can afford to keep big businesses going, they will. Whether things will get bad enough that the government can't afford to do that is an exercise to the reader.
I mean, we are approaching the point where the government can't afford to do that. Debt is near $40 trillion, and debt held by the public has recently just slightly tipped over 100% of the US GDP, so we are long past affordability.
Interest payments on US Debt are already $1T annually. If GDP stops growing faster than the interest rate on the debt, we're "cooked" as the kids say.
If we lose reserve currency status, we are equally screwed.
A big tech bailout isn't going to look like a big cash injection. It would look more like total asset seizure and nationalization of those companies.
Money is just numbers.
If we didn't have food, you'd have a point. If factories weren't churning out more stuff than anyone knows what to do with - you'd have a point.
All this is is a bunch of incompetent, spoiled idiots in positions of power that will sooner or later have to make room for people who know what they're doing.
Nobody in this globalized economy is interested in things no longer working - even the incompetent idiots. All that has to happen is 60+ year old retards who thought they were going to move up the power ladder because 'seniority' will need to go fuck off and play golf and their children will need to go fuck off and work in lower middle management.
That's all.
Of course they spend billions every year telling you otherwise. Their other big lie is that we can't tax anyone or do anything because 'they will just leave' or 'China' or 'USSR' or 'terrorism' or some other bullshit. It's all bullshit, it's been bullshit and it will continue to be bullshit until you turn your brain on for 2 minutes and realize it's either retards in charge or not - the rest is talk.
US Government won’t fail. They can certainly just default on all debt and keep on going like many other countries. It will be a shitty country going forward, but not a failed one.
The best thing you can do is diversify assets to be prepared for that scenario, so you do not fall into the hell of a permanent underclass, in perpetual servitude.
The US defaulting would easily trigger the worst economic shock the world ever experienced. Other countries that defaulted weren’t the hegemonic power
I don't think the big companies will fail, but their stock prices could dramatically drop. I think newer smaller companies like OpenAI and Anthropic could easily fail, as well as a bunch of other AI start ups. Altogether it could make for some difficult financial times like in 2000 and 2008
What do we mean by big companies? Because SpaceX is giant and can for sure fail. But do you mean companies with an actual, reliable business model?
"Too big to fail" does not mean "impossible for them to fail".
It means "if they fail, goverment will bail them out claiming their failure would take out the whole economy".
I know, I’m asking them to clarify what “big companies” mean
Yahoo failed. AOL failed.
Both of those companies were essentially expendable in terms of keeping the economy running. AOL didn't own any cell towers and Yahoo didn't have any Pentagon contracts.
A good read when X is "borrowing like never before".
https://pivotal.substack.com/p/minsky-moments-in-venture-cap...
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