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AI Companies Are Trying to Hide a Staggering Amount of Debt

futurism.com

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Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#151

Post by nickff »

senshan wrote: post #135
derf_ wrote: post #131

Earlier quoted context omitted.

> When these fail, it will become everyone's problem. Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.

Are you suggesting that holding private credit assets is relatively risk free? Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.

There's a wide spectrum of 'private credit', and it varies from low-risk to quite high risk, depending on the debtor. In the case of "AI Companies", their debt is low-risk, but many are creating special-purpose-entities which will build and own some or all of their newer datacenters. Those datacenter companies are issuing a great deal of somewhat risky debt; with the exact level of risk depending on the off-take agreement.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#153

Post by enraged_camel »

simonw wrote: post #75

Something doesn't quite smell right about this story. Here's a key paragraph from the Nikkei story that this Futurism story re-tells: > Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks. Does that justify a "tries to hide" he…

Futurism has a pretty strong anti-AI bias. Both article titles and the articles themselves tend to be editorialized. On a scale of zero to Ed Zitron, they're somewhere around the middle.

I don't treat it as a reliable publication when it comes to anything AI related.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#154

Post by natebc »

lumost wrote: post #64
wongarsu wrote: post #53

Do they? Is a company with $200 billion annual revenue and earnings (EBITDA) of $100 billion having $420 billion of off-balance-sheet debt really staggering? In many other industries that would be a perfectly normal amount of debt to have. It's only unusual because we are used to tech companies having so much cash on hand they don't know where to put it

These companies have valuations reflecting a debt light business. At a minimum, 420 billion in debt is enough to change the stock price by 10-20%. If the company plans to add another 400 billion in debt you need to give it the side eye. If 50 billion in revenue is from other companies debt spending… then You have a problem.

> If 50 billion in revenue is from other companies debt spending… then You have a problem.

we may have a problem then.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#155

Post by kingjimmy »

JohnMakin wrote: post #152

> Meta alone has amassed around $420 billion in off-balance-sheet debt, according to Nikkei, Isn't this an existential type of bet?

yes and no. With 82 billion in cash and 22billion profit per year, they can easily service it for a while even if AI consumption takes a downturn.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#156

Post by Marsymars »

toomuchtodo wrote: post #139
Imustaskforhelp wrote: post #137

Earlier quoted context omitted.

During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era) It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic. I do understand what y…

> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.) What do you think the cost would be for prote…

> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will.

I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.

I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#157

Post by conductr »

postalcoder wrote: post #101
lumost wrote: post #64

Earlier quoted context omitted.

These companies have valuations reflecting a debt light business. At a minimum, 420 billion in debt is enough to change the stock price by 10-20%. If the company plans to add another 400 billion in debt you need to give it the side eye. If 50 billion in revenue is from other companies debt spending… then You have a problem.

> These companies have valuations reflecting a debt light business. Sorry, but this doesn’t make sense. The valuations of these companies reflect their growth. In finance there’s nothing inherently virtuous about a “debt-light business”. It’s all an allocation decision based on how you expect to grow relative the cost of that growth. Try and reframe it: are cash-heavy businesses given a premium?

Growth of what exactly? AI doesn't have the normal leverage factor that software usually does where a simple codebase can drive a billion dollars of subscription revenue with 90%+ gross margin. There's no eventual state where the capex is in place and the margins flip. They're in the datacenter business, which is real estate, with tenant improvements consisting of rapidly depreciating/obsoleting equipment. These margins have no path to flip around and allow for a huge amount of revenues to flow through. If they start testing price sensitivity in the way that would justify the valuations, it will just accelerate the transition of AI from datacenter to local.

>Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#159

Post by Marsymars »

kingjimmy wrote: post #155
JohnMakin wrote: post #152

> Meta alone has amassed around $420 billion in off-balance-sheet debt, according to Nikkei, Isn't this an existential type of bet?

yes and no. With 82 billion in cash and 22billion profit per year, they can easily service it for a while even if AI consumption takes a downturn.

That's their quarterly profit.
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