The rate at which the big AI companies are spending money right now makes the worst examples from the Luxury Trap appear like consumption-fearing misers.
That has fueled fears of a bubble and sent stock prices tumbling.
What does a company that has just received 835 new billions from small savers do? Borrowing 245 billion at high interest, of course!
That’s what Elon Musk space company SpaceX did last week. When the company went public on June 12, it was the largest IPO ever by a wide margin.
A whopping $85.7 billion worth of shares were sold. Investors all over the world bought.
The money will go to finance the company’s offensive plans in AI where new data centers will be built and powerful processors will be purchased.
But not even 835 billion kroner seems to be enough. In a move that surprised many, SpaceX recently went to the bond market to borrow money, a total of $25 billion.
The interest rate landed at a higher level than for companies with a similar credit rating. In total, SpaceX will pay 1.1 to 1.75 percent above the U.S. Treasury yield, or about 5.5 to 6.5 percent in total. An indication that the lenders do not see SpaceX as a risk-free customer.
When SpaceX went public, the stock rose from an initial price of $135 and closed at $160 on the first day. The price then rose to a maximum of $225, but has since fallen back sharply and is trading around $153, a drop of over 30 percent.
It has spread to other stocks. The IT-heavy Nasdaq index in New York has fallen roughly six percent in a month. Even if it is up 25 percent in one year.
The fact that SpaceX is borrowing money despite an overflowing coffers has caused concern.
A clear sign of that the market has entered a bubble phase, said Ludovic Subran, chief investment officer at German asset management giant Allianz Financial Times.
And the fact that the big tech companies are using more and more borrowed money to finance their plans is something that is starting to be pointed out as a risk. Companies like Alphabet, Facebook, Amazon and Microsoft are extremely profitable and have previously been bathed in cash but are now taking on debt to win the AI arms race.
According to an analysis by the bank JP Morgan, a total of 5,500 billion dollars is now expected to be invested in AI development until 2030, the majority in the United States.
It is a number that corresponds to approximately 8 times Sweden’s entire GDP. By comparison, Europe as a whole is expected to spend $860 billion on defense spending this year.
Of the money, 4.1 trillion dollars is estimated to be borrowed in various ways, according to JP Morgan. That’s as much as the UK’s national debt. In other words, it is about huge sums. The forecasts are also constantly being adjusted upwards.
So far, they are profitable investments, according to JP Morgan. For every kroner invested in new data centers, investors expect the market value to rise by 1.67 kroner.
The question is how long it holds. Right now, the tech giants’ investments in AI are increasing faster than their revenues. And if the investments are to produce a return of 10 percent a year, a rather modest figure, the companies must find new revenues of between 2,000 and 5,000 billion dollars a year, according to a analysis in FT. Today they bring in 1.5 trillion dollars a year. It looks sweaty.
How it will end, no one knows today.
But calculations like this cause great nervousness.
A novelty in New York Times that OpenAI is considering postponing its IPO until next year has diluted the nervousness. One of the reasons given by advisers is precisely SpaceX’s price drop since the listing.
But among those who have invested heavily in the AI revolution, there is nothing wrong with self-confidence
Japanese Softbank with its eccentric leader Masayoshi San recently held a presentation to investors. There, a picture was shown of how the value of the company’s investments, which include OpenAI, could rise fourteen times to a thousand trillion yen in the next sixteen years, all thanks to AI.
For those of you wondering is it a one followed by 15 zeros. That is equivalent to 1.5 times today’s GDP in Japan.
When people pump out numbers like that without blushing, it’s usually a sign that the market is a little overheated, to put it diplomatically.
Of the world’s feleven largest companies in terms of market capitalization, today fourteen are linked in one way or another to the AI boom.
One can only hope that it goes well.
