[wongarsu]

Do they? Is a company with $200 billion annual revenue and earnings (EBITDA) of $100 billion having $420 billion of off-balance-sheet debt really staggering?

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

[lumost]

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.

[natebc]

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

we may have a problem then.

[aurareturn]

  These companies have valuations reflecting a debt light business.

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

[psd1]

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.

[postalcoder]

> 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?

[conductr]

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

[DangitBobby]

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.

[waterTanuki]

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.

[DangitBobby]

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.

[oblio]

> 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.

[throwaway667555]

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

[postalcoder]

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.

[hn_throwaway_99]

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.

[Retric]

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.

[Aurornis]

> 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.

[pinkmuffinere]

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.

[joshstrange]

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

[bandrami]

People said that in 2008, too!

[FridgeSeal]

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!!

[Noaidi]

It is not just that they have the debt, it. is they are trying to hide the debt. Why would a legitimate company try to hide their debt?

[postalcoder]

There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk, and many more.

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.

[davnicwil]

> I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.

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.

[Imustaskforhelp]

> There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk, and many more.

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.

[0]: https://news.ycombinator.com/item?id=49023596

[sdellis]

"There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk,..."

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.

[WarmWash]

She's a witch!

[ch4s3]

> is they are trying to hide the debt.

They aren't hiding it though. The contracts are recorded in regular filings.

[Noaidi]

Rope a doped with cope. Maybe you should buy some $ORCL?

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."

[ch4s3]

Retail investors shouldn’t be investing in individual stocks outside of industries they understand well. Following GAAP is the definition of not hiding the obligations.

[chairmansteve]

Maybe GAAP should be changed? Professional investors have the time to comb through the small print. These off balance sheet activities seem designed to bamboozle the small investor.

[turtlesdown11]

Enron also didn't violate GAAP so by your definition, no financial wrongdoings...

[linkregister]

The essence of the Enron scandal was the perpetration of accounting fraud. It took down Arthur Andersen. We went from the "Big 5" accounting firms to the "Big 4" because of this. They very much violated GAAP.

https://en.wikipedia.org/wiki/Enron_scandal

[nater5000]

>but may make it difficult for retail investors to recognize risks

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.

[timacles]

Because they have even more debt than the debt we assume they’re trying to hide

[luckydata]

they aren't trying to hide anything, those are accounting rules that are applied to the letter. I'm feeling like I'm taking crazy pills whenever I see this stuff about AI, your hate boner for a specific technology shouldn't trigger you saying things that are provably untrue.

[luckydata]

the downvotes are just further proof of how stupidly this kind of discussion is handled on hacker news. It's demoralizing the lack of quality this community shows lately.

[gsky]

People used to complain that these big companies were sitting on money and not investing.

[dualvariable]

Which routed those funds through the economy's financial circuit and caused ZIRP, inflation in asset prices, and the evaporation of risk premiums.

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.

[strictnein]

To be fair to the author, they have no background in finance and work at a site that knows that anti-AI stories get a ton of traffic. The entire site is now just doom-and-gloom clickbait headline after clickbait headline.

[cheschire]

Bob spends $5 on Alice’s lemonade. Alice spends $1 on lemons from Jack. $15 on wood for the stand from Jill. Jack spends $5 on pesticide from Bob. Jill leases the plot for the tree from Jack for $10. Jack spends $5 on lemonade from Alice. Jill spends $10 on lemonade from Alice. Alice spends $3 on more lemons from Jack. Jack builds a stand to sell lemons with $20 in wood from Jill. Jill leases more land from Jack.

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.

[foxyv]

I think that a lot of the accounting, used mostly in factories and such, is having trouble with the new financial reality in the tech space. Running a factory, having a debt to asset ratio over 1.0 would be disastrous because the assets are unable to produce revenue fast enough to cover the interest.

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.

[turtlesdown11]

> they don't know where to put it

ohh, their accountants just dont know where debt goes on the balance sheet. thanks for clearing it up

[theredleft]

brother read those numbers out loud

If I make $200k I do not have $400k off-balance gambling debt

[HDThoreaun]

This "debt" is almost solely rental style deals with datacenter constructors. If you make 200k and have a 400k mortgage youre doing just fine.

[jszymborski]

Datacenters that have not and might not be built to accommodate for future AI demand that may or may not grow to the extent or as fast as the companies anticipate.

[HDThoreaun]

Whether the datacenters will end up profitable is a different question than whether they are a real risk for the business. This whole thing could be a massive mistake and all the big tech companies will come out the other end just fine. I think the executives at these companies realize that, this whole build out is a massive case of FOMO. No one wants to be microsoft missing the boat on mobile and theyre willing to flush money away to ensure that never happens.

[rightbyte]

Windows Mobile predated the iPhone by like 4 years or something. MS didn't miss the boat they steered a crappy boat.

[fecal_henge]

They missed the port.

[dmurvihill]

A 400k mortgage needs a new roof after 25 years. A data center needs its hardware completely replenished after 5 (or less).

[danny_codes]

Data centers are depreciating assets. I'd class it more like a fancy car than a house.

[bandrami]

Your house (hopefully) goes up in value. The datacenter goes down.

[anonymars]

Land tends to appreciate, but not so much the rotting box atop it

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

[bandrami]

And the hyperscalers have made the (questionable) choice of depreciating that hardware over 6 years rather than the usual 4.

[greenlimetea]

> $200 billion $100 billion

That's a fun way to say is not profitable and loses billions a year