Investors are increasingly concerned about the amount of capital needed to make building artificial intelligence a reality.
This event is unfolding in real time in the bond market, with big name stocks getting involved in the riot. google, Amazon and meta -Credit spreads are widening as bond investors seek higher returns for lending to companies.
Yields rose this week after Alphabet raised its capital spending outlook, raising concerns that other hyperscalers will follow suit.
One reason capital spending budgets are increasing is the rising cost of electricity. Energy is a big expense for all the hyperscalers who are building massive data centers across the United States at breakneck speed.
GE Vernova CEO Scott Strzyk told CNBC that he expects the current inflation environment to continue, due in part to the heightened geopolitical backdrop. Just this week, oil topped $100 per barrel.
Fluctuations in government bond yields are also causing anxiety among bond investors. Mizuho said in a letter to customers Friday morning that the hike in capital expenditures is testing the limits of investors, as companies once seen as bastions of capital now face dramatic increases in AI-related costs.
Analysts added that hyperscalers now collectively plan to spend more on capital than they generate in free cash flow by next year.
“There is a heated debate between fixed income and equity investors with exposure to the biggest players in the tech industry,” said a credit fund portfolio manager who requested anonymity to discuss sensitive conversations.
As concerns grow; oracleFive-year credit default swaps (CDS) are once again trading at multi-year highs.
Barclays credit analyst Andrew Keches wrote in a note to clients on Wednesday that Oracle’s CDS is once again being seen as a proxy for AI debt anxiety.
“The appeal of ORCL CDS in recent history extends beyond company-specific fundamentals, reflecting its role as a liquid hedge against AI capex, OpenAI execution, and the broader data center spending narrative,” Keches wrote.
Oracle is facing questions from investors about how aggressively it plans to enter the debt market in the coming years as building and leasing data centers becomes increasingly capital-intensive.
Earlier this month, rating agency S&P Global downgraded Oracle’s credit rating to BBB-, one notch above junk status.
Still, company executives remain confident in Oracle’s ability to win the AI race. The company is expanding its relationships with: OpenAI And hyperscalers like Meta Nvidiawe are also collaborating with Oracle on cloud architecture.
Still, portfolio managers who spoke to CNBC said changes in tech bond yields could affect the financing of future deals.
Meta is considering financing a $12 billion Texas data center, with pricing expected to be finalized early next week, said the people, who requested anonymity to discuss the company’s plans.
The Financial Times reported that the deal will be priced at a higher borrowing rate than previous projects, a sign that investors are not only looking for more demand but are also questioning the return on investment.
