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Comment by postalcoder | Hacker News Reader

> 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?

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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.

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.

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.

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.

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