What If AI Can’t Borrow Money?
There is a growing concern that the hundreds of billions of dollars needed for AI data centers may be hard to get if AI results tumble at all. This could come in the form of high losses and low revenue at the major players led by OpenAI. Alternatively, it could arrive if a large public company counting on AI for growth find it comes more slowly than expected.
Either way, investors in private equity and megatech companies like Nvidia may find it harder to raise capital.
Axios says that some of the money is coming in loans and not equity investments. That should be an alarm. Investors who expect to be paid back in money are different from those who let their money ride as returns arrive.
‘ Bulls may argue that Big Tech firms have enough free cash flow to finance their AI goals without taking on debt, but “it turns out that’s increasingly not the case,”’ MIT research fellow Paul Kedrosky told the media outlet. Each megatech company has well more than $100 billion on its balance sheet, increasing each quarter. The idea that these pools are running low should be a red flag. Moving to other sources for capital creates the risk that the lenders have a say in the future.
Nvidia’s Challenge
AI is expected to generate profits at some point, but for companies like OpenAI that number is several years out. Investors are not as patient with Microsoft and Meta. They will look for revenue and profits with each quarterly report that public companies must file.
Part of the capital needed for data centers is the land and infrastructure buildout, including electricity. Another large portion is for the chips that come from Nvidia. If Nvidia’s earnings are dented, so is its ability to round-trip more money via money put into OpenAI, most of which is used to buy Nvidia chips.
Debt is no one’s friend, except perhaps the lender.
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