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
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.
All other things being equal, debt is a downward force on that perception.
That is a general point, although I'll stipulate it isn't a factor in AI picks because they are approximately all doing the same and because the market is giddy with FOMO. More strongly, i believe that some Schmanthropic with equivalent offering and unit cost and userbase but with sustainable finance would signal, through lack of recklessness, that it is not "going to the moon". I'm willing to call this "irrationality". But hey, I'm not exposed, other than being a taxpayer with savings who will inevitably foot the bill for the bailouts.
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?
>Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits
I think the burden of proof is on the closed SOTA model providers to prove they have a moat, because common sense indicates they don't.
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.
we may have a problem then.
By the time we're reading headlines about this debt, it has been known to institutional investors for a long time.
The debt is priced into the valuation.
1. It's widely known that Spacex is overvalued. How is it possible for it to be widely known, and yet still overvalued? Either it is fairly valued, or these issues are _not_ already priced in.
2. If people read Enron's filings, they could have been aware of the shady reporting, and should have seen the reduction in price coming. But clearly most did not! Enron persisted for a long time despite shady tactics, that essentially were happening "in the open" if you dug into the paperwork.
3. The same argument can be made about housing loans during 2008, the dot com boom in 2000, and the response to covid in 2020
If you're interested I have much more to say on the topic! It's fascinating and I've only recently been convinced that the efficient market hypothesis is untrue (or at least it is suspect). I also highly recommend any of patrick boyle's videos, he makes great content often touching on this topic.
disclaimer: I'm not an expert in this industry, or really in this industry at all. I just like learning about it.
Here is the link (oddly I could not find it with HN Search): https://news.ycombinator.com/item?id=48917135
No need to worry or discuss further, it’s all priced in! Everything’s totally fine!!
This is all like CFO 101 type stuff, and not nefarious. I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.
Maybe the best way I can explain it to the programming crowd is this: imagine how ridiculous it would sound if outsiders were saying that Google was on the verge of collapse because its codebase has billions of lines of code.
I don't know if you intended this to be exclusive of the opposite, but I do often find actually the opposite thing is true. That is people tend to be wildly, inappropriately optimistic for things they don't understand well and more likely to be skeptical in the details of things they do.
Agreed, there are many valid reasons to have subsidiaries of course.
The issue is rather with the fact that we are having the assumption that the threat is outside rather than inside and so systems with mechanisms to be less transparent are far more prone to this risk.
It has been academically shown that most corporate/ white paper scams aren't done from outside but rather from inside the company itself through genuine structures and incentives which go wild. (Something shockingly visible in AI space), Enron's example also comes to my mind.
The best way I can explain it to the programming crowd is this: Imagine how ridiculous it would sound if you are ranked with how many lines of code you ship and how much token you would spend and so we end up with tokenmaxxing and hearing stories about people literally burning tokens in innovative ways because they want to get on top of a leaderboard. Oh wait, it is already happening or has happened.
Generally speaking, It is preferable to be transparent with debt and other things rather than not especially so for long term because sooner rather than later you might get caught. Obviously if there is some stuff which prefers from ringfencing risk then sure.
Also as I spoke of Enron, but the exact structure was used by Enron as well as @fzeroracer discusses in their comment[0] so it might be a genuine question.
In other words, they are intentionally deceiving investors and hiding the risk from them. That does not sound like CFO 101, it sounds like fraud. But if grift is your business, I guess those are as valid reasons as any.
They aren't hiding it though. The contracts are recorded in regular filings.
https://asia.nikkei.com/business/technology/five-us-tech-gia...
"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."
"Today's AI industry is partly supported by demand generated by circular investment. Nvidia and tech giants invest in data center operators and AI companies, with that money then turning into GPU and cloud usage fees. Actual demand is difficult to see, increasing the likelihood of over investment in data centers."
Ok, so just to be clear: institutional investors are (a) the ones investing the large proportion of capital in these companies and (b) are well equipped to decipher financial statements. The idea that any significant amount of retail investors have even seen a financial statement, let alone is making decisions based on their analysis of a financial statement, is laughable. And, even then, if someone is putting in that effort, then presumably they're not going to get tripped up by a legitimate practice that they ought to specifically be looking for given the context.
And all of that doesn't even take into account that every article discussing the financials of AI firms over the last half a decade have been pointing out these dynamics. We're literally in a thread discussing this exact dynamic. Retail investors are certainly far more likely to make investing decisions based on these kinds of articles and threads than they are based solely on independent financial statement analysis that they're conducting. At a minimum, I think anybody taking any of this seriously has gotten the hint by now.
If it comes out that these firms are committing straight-up fraud, then there will be a lot more to discuss. But, as of now, the sentiment is that these firms are behaving perfectly legitimately, just abnormally and maybe irresponsibly compared to their historical context. If an investor isn't equipped to handle this kind of analysis under these circumstances, then I'm not going to feel too bad if they lose their money "investing" when they're really just gambling.
But the pendulum swinging rapidly to the other side has routed all those funds through the real economy, caused goods inflation, and looks like it will crash the economy.
Take the circular money and add even more spend, even less profit, and somewhere in the background is a money tree that is about to die.
With tech it's weird because something that is worth nothing on an accounting sheet could be worth a hundred billion dollars during a sale to Alphabet or Meta.
ohh, their accountants just dont know where debt goes on the balance sheet. thanks for clearing it up
If I make $200k I do not have $400k off-balance gambling debt
I bring this up not as a "well, ackshually" but because the datacenter analogy is more similar in that respect...except worse, because now it's a rotting box full of very expensive hardware that hasn't historically held a lot of value until this current shortage
That's a fun way to say is not profitable and loses billions a year