AI spending threatens Amazon, Meta, Alphabet’s credit quality

The multitrillion-dollar annual race to build artificial intelligence infrastructure is eroding free cash flow and increasing balance sheet risk for so-called hyperscalers, Moody’s Ratings has warned.

Moody’s said in a research note published this week that even the world’s most cash-rich companies are struggling due to soaring spending. alphabet and microsoft They rely heavily on debt, stock sales, and off-balance sheet investments to fund their AI ambitions.

“Historically, these companies have relied on asset-light structures centered on software, intellectual property and scalable cloud services, requiring small capital investments,” Moody’s said in a note Wednesday. “Moving from an asset-light to an asset-heavy model requires unprecedented levels of investment and capital raising.”

The move “threatens the credit quality” of six companies tracked by Moody’s, including Microsoft. Amazonalphabet, meta, oracle and coreweave, According to the report.

The rating agency predicts that capital expenditures, or investments in physical assets such as data centers, will reach $785 billion in 2026 and about $1 trillion next year.

The changes break with the decades-old Silicon Valley formula that has produced some of the world’s most valuable companies. The cost of duplicating software is negligible, resulting in strong profit margins and a strong balance sheet. In contrast, generative AI requires a huge physical footprint. Warehouses are packed with expensive, energy-intensive servers and chips.

To fund their expansion, big tech companies are increasingly turning to Wall Street, and as a result, profits in the financial industry are soaring.

The six hyperscalers collectively have about $460 billion in direct debt, according to Moody’s. Tech companies are also using the public markets to raise cash, including Google’s parent company Alphabet, which last month announced an $85 billion stock sale.

The rating agency noted that AI hardware and infrastructure requires large up-front investments, but returns are realized over a long period of time, putting pressure on free cash flow across the sector.

To take direct debt off the balance sheet, hyperscalers primarily rely on off-balance sheet financing through long-term data center leases, the report explains.

According to Moody’s, lease commitments across the group have ballooned to $1.2 trillion. More than $820 billion of this comes from leases that have not yet begun, meaning data centers are still under construction.

Although these obligations do not appear as traditional debt, Moody’s says it considers them to be debt equivalent to debt that locks a company into large future rent payments.

Moody’s noted that despite the warning, Microsoft, Alphabet, Amazon and Meta maintain some of the strongest corporate balance sheets in the world, and their investment-grade ratings are unlikely to be under immediate threat.

Although the company’s free cash flow is tight and its borrowing buffer is shrinking, Moody’s does not believe the company’s investment grade rating is under immediate threat of downgrade.

The immediate pressure is concentrated on lower-rated companies such as Oracle and specialized AI cloud provider CoreWeave. Oracle is rated ‘Baa2’ with a negative outlook, just two notches above junk status.

CoreWeave, on the other hand, operates in a high-yield market with a Ba3 rating and relies on complex private debt structures to finance its GPU hardware fleet.

Moody’s also pointed to structural cyclicality in the AI ​​boom. Moody’s said some of the billions of dollars in backlogs hyperscalers are reporting stem from strategic deals with pre-IPO artificial intelligence labs such as OpenAI and Anthropic.

Both companies have invested billions of dollars in AI labs and, in turn, spent millions on the same companies’ cloud computing, creating what Moody’s describes as a circular AI ecosystem.

Moody’s said overlapping relationships increase risk as many of the industry’s biggest companies increasingly rely on the same AI customers and the same assumptions about future demand.

Still, the tech giant has significant strengths that can help offset those risks.

Demand for AI computing remains strong, cloud businesses continue to grow, and hyperscalers have signed long-term customer contracts worth hundreds of billions of dollars with predictable revenues. These transactions support the industry’s generally positive credit profile despite the consumer boom.

Still, Moody’s says investors should recognize that the tech industry’s financial landscape is undergoing structural changes not seen in the cloud era.

“Investors will increasingly focus on whether these companies can deliver adequate returns on investment,” the rating agency said.