Subject: Re: CDS and hyperscaler lending
Interesting article in the FT a few days ago, talking about the problematic economics of what the biggies are doing.

The Impossible Maths of the AI Boom
from https://www.ft.com/content/32b...

"...Indeed, the US economy is growing solely because of the tech boom. I calculate that over the past four quarters, 93 per cent of US GDP growth was explained by tech investments. Even at the peak of the TMT bubble, it barely reached 60 per cent.
...
"Hyperscalars Microsoft, Alphabet, Amazon, Meta and Oracle* plan to invest hundreds of billions in the next five years in data centres to provide the computing power to tun these models.
This is where the maths of the AI boom becomes challenging. For each hyperscaler, I collected the consensus estimates of analysts for the capital expenditures and revenues between 2025 and 2030.
In these five years, capital investments are expected to rise by 20 per cent a year, a growth rate never seen before in this industry. Revenues are expected to grow 15 per cent annually. If we make the heroic assumption that there are no costs, then the additional revenue is the profit that these companies are set to make from their additional investments in AID data centres.
Yet, even under these extremely optimistic assumptions, I calculate the implied return on investment is highly negative for all of them, except Amazon.
These number show that, if the hyperscalers continue on the current trajectory, the AI boom will become a story of one of the largest destructions of shareholder value in history..."


Maybe they should be called subscalers rather than hyperscalers? The attractions of the firms was traditionally that their unit economics improved with size: not much incremental capital required to support an incremental user. But this now may not only have ceased being true, but even gone into reverse in some cases. Though perhaps only for a while, who knows.

At the very least, free cash flow yields are under pressure. i.e., tanking. From an article elsewhere:
"Wall Street forecasts show the combined free cash flow of Amazon, Alphabet, Microsoft, and Meta could drop to around $4 billion in the third quarter. This marks a dip from the quarterly average of $45 billion since the COVID-19 pandemic."

Jim

* O, MAMA.