Haymaker Daily
On the Great Eight's cash & debt
Hello, Subscribers:
The comparative outperformance of the largest eight AI companies versus the other 492 companies in the S&P 500 since the summer of 2003 is one for the record books. Several of these companies now have multi-trillion-dollar market values with Nvidia pushing $5 trillion. As a result, their outlook has significant implications for equities overall.
As you will notice in the above image, this Great Eight is beginning to behave in a decidedly less great manner. It could be, of course, just a pause on the way to another up-leg. Alternatively, it could be reflecting growing investor unease with the hundreds of billions of AI-related capital spending and the deleterious impact that is having on the balance sheets of companies like Meta and Oracle. This is because a considerable amount of the development outlays are being financed with debt (several of these entities have already blown through their once immense cash holdings).
There is also the related and growing fear that returns on these towering expenditures will be inadequate, at least relative to the previously lush profit margins these companies once enjoyed. Because their valuations are exceedingly generous, this has the potential to cause some serious disappointment.
BoA’s highly regarded chief strategist, Michael Hartnett, is suggesting shorting the bonds of some of the top hyperscalers, such as those shown above, to profit from this situation. While only the most sophisticated investors will attempt such a move, a more plausible reaction might be to simply take some gains on these hyper-valued names.
David “The Haymaker” Hay
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This article comes at the perfect time, offering a crucial analysis of the AI giants' spending. It's incredibly insightful to consider the long-term balance sheet implications. Thank you for this esential perspective.