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AI Companies Are Trying to Hide a Staggering Amount of Debt

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

#281

Post by magicbook »

skohan wrote: post #62
senshan wrote: post #56

As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem. > Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private e…

Couldn't it be a problem given the concentration of the S&P in these companies? At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

Isn't that considered a likely case? I always assume that my sp500 holdings are worth roughly half of what they are (and base retirement and spending decisions on that number). and most financial advisors will tell you future returns of sp500 for 10 years out will barely keep pace with inflation, if that.

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

#282

Post by oblio »

throwaway85825 wrote: post #262
matwood wrote: post #170

Earlier quoted context omitted.

An AI collapse would represent a generational buying opportunity for companies like Meta, Google, and MS. It would be bumpy for a bit while things unwind, but eventually all this FCF they have been dumping into AI would start dropping to the bottom line instead. It's like when Meta stopped dumping money in Reality Labs, but on a much larger scale.

For it to be a buying opportunity would require the mega corps to continue growing post bubble pop. This is questionable given how large they already are.

And a lot of their apparent growth post 2022 is AI, but most likely at subsidized, unsustainable prices. So demand that isn't real.

Plus apparently at least for Google, but from other news sources I've seen, at least Amazon and Oracle have basically mortgaged their future in other business units to fund AI, so it's likely many of these other business units will underperform (or already are).

So lots of new debt, unverifiable growth that could be shady, coupled with a slow down of their other businesses could be a really bad combo.

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

#283

Post by DangitBobby »

conductr wrote: post #157
postalcoder wrote: post #101

Earlier quoted context omitted.

> 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 marg…

I think your analysis assumes current closed SOTA models have no moat, which isn't a given considered the protectionism the Trump administration is already considering for US AI firms.

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

#284

Post by oblio »

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?

> The valuations of these companies reflect their growth.

If you look at was happening around 2022 - 2023, their growth was slowing down. Lots of the new growth is based on AI but since almost everything AI based is subsidized to hell and back, we have no way of knowing yet if that AI demand is real at unsubsidized AI prices.

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

#285

Post by trhway »

For the last 20+ years i was really relaxed about tech industry - the fat cash positions maintained by the companies as a lesson from the early 2000-s crash (when companies were running out of cash and failing or severely downsizing, etc.) almost guaranteed that the tech will easily weather any trouble times - and that was clearly demonstrated in 2008 and in 2020.

Now i'm starting to get scared - these cash positions are basically gone if matched against the new debt and various creative financing taken on for the AI buildouts. That looks a lot like 2000 - very promising tech everybody is piling money in. And i'm sure that several years later it will provide several decades of tremendous success like Internet did in the last 20 years. It is just those few initial choppy years of the hockey stick trough that we may be coming upon and that many may not survive not having that fat cash position anymore, and thus those years may happen to be very painful for the tech and for the whole economy.

25 years ago there were a lot (estimates put even as high as 95%) of dark fiber left as a result of the dotcom buildout and crash. It was successfully put back into action several years later. I wonder whether we will have similar dark datacenters in a few years.

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

#286

Post by oblio »

HDThoreaun wrote: post #230
skohan wrote: post #50

Earlier quoted context omitted.

If it didn't matter, why would they bother jumping through hoops to keep the debt off their balance sheet? In the run-up to 2008 a big factor in the bubble forming was that poor quality loans were packaged in a way to hide the risk in those investments. I'm not expert enough in finance to know if it's the case now, but we do know that clever accounting to hide debt can lead to the incorrect valuation of assets, poten…

Because this isnt actaully debt. Almost all of it is agreements to pay for completed datacenters from developers. Its just a way to offload operational risk when constructing datacenters. If the construction somehow fails theyre not stuck with the bill.

> If the construction somehow fails theyre not stuck with the bill.

Who is stuck with that bill and what is their ultimately their primary source of financing?

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

#287

Post by HDBaseT »

LargeWu wrote: post #243
duzer65657 wrote: post #179

Earlier quoted context omitted.

most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.

Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings". Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's im…

It is either that, or they have tons of debt. (Sometimes both!)

The average person is struggling in modern America.

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

#288

Post by kmbfjr »

light_hue_1 wrote: post #216
MattGrommes wrote: post #191

Earlier quoted context omitted.

When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.

And lose the tax advantages? That's crazy

Keep in mind post tax income sources are king when retiring before age 65 and looking for ACA subsidies.

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

#289

Post by greenlimetea »

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

> $200 billion $100 billion

That's a fun way to say is not profitable and loses billions a year

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

#290

Post by michaelt »

rocho wrote: post #267
hualapais wrote: post #144

Earlier quoted context omitted.

I suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies. Personally, I drop the financial sector entirely (Thomistic proh…

Why do you consider bonds usury?

In many historical societies, religious prohibitions on usury meant the charging of interest of any kind.

Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful.

And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.

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