Moody's warns of AI investment frenzy impacting tech giants' financial soundness and putting pressure on free cash flow for companies such as Microsoft (MSFT.US) and Oracle (ORCL.US)

The Zhitong Finance App learned that as global tech giants compete to increase the construction of artificial intelligence infrastructure, Moody's Ratings warns that the AI investment boom is eroding the free cash flow of large cloud computing service providers and driving up balance sheet risks. In the future, investors will pay more attention to whether these companies can get sufficient returns from huge AI investments.

Moody's said in a research report released this week that six technology companies, including Microsoft (MSFT.US), Amazon (AMZN.US), Google parent company Alphabet (GOOGL.US), Meta (META.US), Oracle (ORCL.US), and CoreWeave (CRWV.US), are shifting from an “asset-light” business model that relied on software, intellectual property, and cloud services in the past to a “heavy asset” model that required large-scale construction of infrastructure such as data centers.

Moody's pointed out that this transformation requires an unprecedented level of capital investment and financing, and could weaken the credit quality of these companies.

The agency predicts that investment in AI infrastructure will continue to rise, and the capital expenditure of the six companies will reach about $785 billion in 2026, and further approach 1 trillion US dollars in 2027.

The report points out that compared with traditional software businesses, generative AI requires a large amount of hardware investment such as data centers, GPU servers, and high-performance chips, which has led to a fundamental change in the development path of the technology industry that has relied on an asset-light model to maintain high profit margins and a stable balance sheet for a long time.

To support the expansion of AI, these tech giants are increasingly relying on capital market financing.

According to Moody's data, the size of the direct debt of the six major cloud computing service providers has now increased to about 460 billion US dollars. At the same time, companies also continue to finance through the capital market. Among them, Alphabet announced an equity financing plan of up to 85 billion US dollars last month.

In addition to debt and equity financing, more and more companies are also using off-balance sheet financing methods to reduce balance sheet pressure.

Moody's said that since AI hardware and infrastructure require huge upfront investment and the related revenue release cycle is relatively long, the overall free cash flow of the industry continues to be under pressure. In order to avoid a direct increase in debt, tech giants make extensive use of long-term data center leasing and other methods for financing.

Up to now, the total data center leasing commitments of the six companies have increased to about 1.2 trillion US dollars, of which more than US$820 billion corresponding data center projects have not yet been put into use and are still in the construction phase.

Although these lease commitments will not be reflected in the balance sheet in the form of traditional debt, Moody's believes that it is essentially a long-term debt equivalent to debt, and it will still create huge rent payment obligations in the future.

However, Moody's believes that Microsoft, Alphabet, Amazon, and Meta still have one of the strongest corporate balance sheets in the world, and it is unlikely that investment-grade credit ratings will be affected in the short term.

In contrast, lower-rated businesses are under greater pressure. Oracle's current credit rating is Baa2, with a negative rating outlook, which is only two levels higher than the junk rating; Coreweave, which focuses on AI cloud computing services, is BA3, which is a high-yield bond category, and its GPU infrastructure mainly relies on complex private debt financing structures.

Furthermore, Moody's also pointed out that the current AI industry chain is forming an increasingly obvious “circular ecosystem.”

According to the report, large cloud service providers have invested billions of dollars in AI startups such as OpenAI and Anthropic in recent years, and these AI companies have also purchased large amounts of cloud computing resources provided by companies such as Microsoft, Amazon, and Google, thus forming a circular model where capital, customers, and infrastructure are interdependent.

Moody's said that this cross-shareholding and customer relationship means that industry leaders are increasingly relying on the same group of AI customers and the common assumption that AI demand will continue to grow in the future. Once industry demand falls short of expectations, related risks may increase simultaneously.

However, the agency believes that the current demand for AI computing power remains strong, the cloud computing business continues to grow, and large cloud service providers have signed hundreds of billions of dollars of long-term customer contracts, providing high predictability for future revenue, so the overall credit situation remains stable.

Moody's pointed out that future investors will pay more and more attention to whether technology companies can turn the rising AI capital expenditure into a reasonable return on investment. This also means that the technology industry is undergoing one of the most profound changes in the financial structure since the cloud computing era.