Bank of America issues warning that 'AI bubble' may fizzle out because of a cash crunch
It's been a few years since a surge in ChatGPT's popularity signaled the rise of AI. While tech giants are trying to outpace each other in the Artificial Intelligence race, the Bank of America just issued a new report that points to a troubling shift in how tech giants are funding it. In the research cited by 24/7 Wall St, the bank noted that borrowing for AI data centers has surged in September and October, with giants like Meta Platforms, Oracle, and others issuing over $75 billion in bonds and loans. This comes as other experts and firms are warning that the 'AI bubble' is about to burst because of a cash crunch.
According to the outlet, the tech giants have been fueling their ambitions through strong cash flows from their core businesses. However, the capital expenditures are approaching the limits on what the company's cash flows alone can support. Questions around sustainable growth amid high valuations have been raised, as the tech giants are increasingly relying on debt to build infrastructure for AI models.
Bank of America's analysis highlighted the pivot of funding AI ambitions through debt instead of cash flow. The report noted a surge in borrowing in recent months, as key players like Amazon, Alphabet, Microsoft, and others reported a steep rise in capex shares. This trend suggests that the self-funded model that drove rapid progress in AI may be under strain, forcing companies to take on more debt to keep the momentum up.
The report further suggested that tech giants are already carrying substantial debt. Recently, Meta struck a $30 billion financing deal, taking in $27 billion in debt for a Louisiana data center, all of which is backed by its operating cash flows, which exceed $20 billion, and low-interest expenses under $200 million as per the last quarterly report.
On the other hand, Oracle has a net income of about $3 billion, and its interest payments could consume a large share of its profits if rates rise. Thus, the publication suggested that Oracle is spending the money it doesn't have on facilities that are under construction, for customers that the company doesn't have.
The report comes amid rising speculation around the AI bubble. Previously, Michael Burry, known as the man who predicted the 2008 financial crash in Michael Lewis's 2010 book “The Big Short: Inside the Doomsday Machine,” shared cryptic posts before betting against Nvidia and Plantir, the two biggest companies in the AI sector. He shared a circular diagram showing how Nvidia, OpenAI, Meta, Oracle, Microsoft, and other tech companies were fueling the "AI Money Machine" by paying each other.
Following Burry's speculation, Nasdaq suffered its worst week since April, with AI-linked stocks tanking. Analysing the trend, Sevens Report also issued a research, suggesting that investors are being forced to confront the gap between AI spending and returns, Investing.com reported.
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