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Comment by lumost | Hacker News Reader

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.

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  These companies have valuations reflecting a debt light business.

It's more to do with growth rate in my opinion.

To be precise, market perception of future growth.

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.

> 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 pertinent comparison in valuations is debt vs equity, not debt vs cash as you noted.

My point was more of an exercise to point out that finance is about mutating resources. A lot of cash can be a good thing or a bad thing. Same for debt. There’s nothing inherently bad about levels.

Debt always raises risks, it can be rational but an asset rich and debt free business is vastly less likely to suddenly fail which has a real impact on rational evaluation of the value of their stock.

While there may not be anything inherently bad about debt levels, the level of debt fundamentally affects stock price by the equation of total enterprise value = stock + debt - cash (i.e. total enterprise value is the amount someone would need to pay to buy all the outstanding equity AND take on or retire the outstanding debt). So if there is hidden debt that isn't being factored in by investors in means the stock price should go down because "how much a company is worth" (i.e total enterprise value) would remain the same, it's just now that more is debt and less is shareholder equity.

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

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.

It is a given. Unless the Trump admin figures out how to ban 1s and 0s, you can't stop Chinese labs from open sourcing their models. They can certainly ban new providers from using the Chinese models, but they can't ban Canadian ones, European ones, other Asian countries etc. from setting up provider proxies and bypassing those rules. Then what, great firewall of USA? Block off all internet traffic to other countries? Bye bye economy.

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.

Yes, banning 1s and 0s is completely impossible and unprecedented /s. I wouldn't choose either as a default until the dust settles. Either way, I wanted to point out the unstated assumption. Whether you personally believe it's a foregone conclusion or not, it's an essential part of the logic chain that not everyone will agree to.

It's a gamble, stats, so what is the probability that moat can be protected to the tune of trillions of dollars of incremental enterprise value creation in the AI industry? Would you bet your retirement funds on it? Would you want the government to bail them out if a financial collapse occurs because of it? I think most reasonable people do not think it's worth the risk, and the more important part I highlighted is the fundamental economics of this industry were never worth the investment/risk. Clever capitalists will always find a way, which this accounting shell game is evidence of.

> 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.

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

we may have a problem then.

> These companies have valuations

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.

There was an article on Hacker News just the other day explaining that no one knows what the value of these used GPUs are going to be and that people underwriting are just, essentially, just guessing.

Here is the link (oddly I could not find it with HN Search): https://news.ycombinator.com/item?id=48917135

Ooh look! “The x is priced in”! My favourite financial thought terminating cliche!

No need to worry or discuss further, it’s all priced in! Everything’s totally fine!!

This is a common objection, "It's already priced in". I've believed it for a long time, but also been really interested in the claim, since it feels recursive in the kind of suspicious way. Recently I read / watched a lot of material about it, just out of personal interest. In short, this claim (the efficient market hypothesis, "It's already priced in") is very optimistic. It's not possible to prove definitively if it is or isn't true, and people will argue both ways. However, it seems very unlikely that _all_ effects are _always_ already priced in. Some evidence by way of contradiction:

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.

People said that in 2008, too!

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