San Francisco Frontiers - AI giants turn to massive debt to finance tech race

On a day when Facebook-parent Meta's share price plunged on the heels of disappointing quarterly earnings, demand for its bonds was reportedly four times greater than supply in a market keen to hold the social networking titan's debt.

The $30 billion in bonds scheduled to be repaid over the course of decades is intended to provide money to continue a breakneck pace of AI development that has come to define the sector.

"(Mark) Zuckerberg seems like he's got no limit in terms of his spending," said CFRA Research senior equity analyst Angelo Zino.

Zino noted that Meta takes in more than $100 billion a year, and that while Wall Street may be concerned with Zuckerberg's spending it sees little risk debt won't get repaid.

"(But) they just can't use up all their excess free cash flow and completely leverage it into AI."

The analyst wouldn't be surprised to see Meta AI rivals Google and Microsoft opt for similar debt moves.

Shareholder worry over Meta spending, on the other hand, is believed to be what drove the tech firm's share price down more than 11 percent during trading hours on Thursday.

Meta's debt, however, drew flocks of investors despite rates for corporate bonds being at decade lows, noted Byron Anderson, head of fixed income at Laffer Tengler Investments.

"Is there some worry about the AI trade? Maybe," Anderson said. "But the revenue and profit coming off that company are massive."

If not for a one-time charge related to US President Donald Trump's Big Beautiful Bill, Meta would have recorded $18.6 billion in its recently ended quarter.

That amount of net income is more than General Motors, Netflix, Walmart and Visa profits for that quarter combined.

- FOMO? -

Anderson doubts that so-called fear of missing out on the AI revolution drove demand for Meta's bond. "I don't think this was FOMO," he said.

"People want good quality names in their portfolios at attractive levels, and this is a high-quality name -- just like Oracle."

Business cloud application and infrastructure stalwart Oracle is reported to have raised $18 billion in a bond offering last month.

According to Bloomberg, the Texas-based tech firm is poised to issue an additional $38 billion in debt, this time through banks rather than bond sales.

Debt taken on by major AI firms is typically secured by physical assets, such as data centers or the coveted graphics processing units (GPUs) vital to the technology.

Given the cash flow and physical assets of tech titans, risk is low for lenders. And the markets have been shaking off the possibility of an AI bubble that might burst.

Meta just days ago announced creation of a joint venture with asset manager Blue Owl Capital to raise some $27 billion for datacenter construction.

Meta and Oracle are also benefiting from recent moves by the US Federal Reserve to reduce the cost of borrowing.

The trend toward debt is new for internet giants long accustomed to having ample cash flow to pay for what they want.

Crucially, debt markets would not be as welcoming to AI startups such as OpenAI, Anthropic or Perplexity which have yet to turn profits.

"I learned in my profession that if a company is not making profits and they issue (debt), that is a risky proposition," Anderson said.

The analyst reasoned that young AI companies like those will have to raise money through equity stakes -- where the financier gets a stake in the company -- as they have done so far.

"I don't know why they would go into the debt market," Anderson said of such startups.

"It would be too expensive for them," he added, meaning the lenders would charge them much higher rates than the likes of cash cows like Meta.

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