Moody’s downgrades Senegal to Caa1 amid rising debt concerns
According to The Wall Street Journal, on an inflation-adjusted basis, technology companies have spent more in the last three years on data centers, chips, and energy than has been spent over the past forty years building out the nation’s interstate system. The massive amount of investments being put to work is stunning. But the Wall Street Journal asks the most critical question: Will they get their money back?
In their article “Spending on AI is at epic levels. Will it ever pay off,” the Wall Street Journal compares today’s AI investments to the late 1990s telecom investments in the fiber optic network. Furthermore, they remind us of some of the leading telecom companies, such as Global Crossing and WorldCom, that went bankrupt due to overinvestment. The internet and connectivity were truly transformational. However, from an investment perspective, they overinvested and could not produce enough revenue to pay their bills. Will AI generate enough revenue and soon enough to justify the massive investments? The article provides a few comments worth sharing:
David Cahn, a partner at venture-capital firm Sequoia, estimates that the money invested in AI infrastructure in 2023 and 2024 alone requires consumers and companies to buy roughly $800 billion in AI products over the life of these chips and data centers to produce a good investment return. Analysts believe most AI processors have a useful life of between three and five years.
This week, consultants at Bain & Co. estimated the wave of AI infrastructure spending will require $2 trillion in annual AI revenue by 2030. By comparison, that is more than the combined 2024 revenue of Amazon, Apple, Alphabet, Microsoft, Meta and Nvidia, and more than five times the size of the entire global subscription software market.
Morgan Stanley estimates that last year there was around $45 billion of revenue for AI products. The sector makes money from a combination of subscription fees for chatbots such as ChatGPT and money paid to use these companies’ data centers.
The AI tech giants predictably argue that they will be rewarded generously for their investments. Time will tell if they are right. As we share below, Hedge Fund investor David Einhorn disagrees and fears they are over their skis.
Is Private Equity Sending A Warning To The Public Equity Markets?
Alongside the rising interest in speculative assets, like some equities, cryptocurrencies, and precious metals, there has been a sharp increase in dollars chasing private equity investments. The graph below, courtesy of Jeff Weniger, shows that the stocks of the largest private equity companies have benefited from the increase in interest since 2023. However, as he shows, over the last few weeks, Blackstone (NYSE:BX), KKR, Apollo, and Carlyle have shown weakness. At the same time, the S&P 500 just hit another record high. It’s also worth noting that the index of the four private equity stocks rallied after the April tariff drawdown, but did not reach the prior high. We should be careful reading too much into the graph, but we would certainly follow the companies for clues they may provide about the chase for speculative assets.
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