Analysing Investor Nervousness Around Big Tech
In the recent bull market, the tech industry has dominated equity markets and reached record-high valuations despite some investors warning markets of a bubble. Amongst many concerns, critics argue that fundamentals cannot explain how the market is currently pricing many both public and private AI companies. American hedge fund manager Michael Burry, who is famous for shorting the real estate market in 2008 and is the protagonist of the movie ‘The Big Short’, agrees and has revealed a short position of almost $1bn against Palantir and Nvidia. Burry also announced he will de-register his fund Scion Asset Management as he explains in a letter to investors, “My estimation of value in securities is not now, and has not been for some time, in sync with the markets, …”.
Last week, we witnessed a sell-off with the Nasdaq index down 2.3% just on Wednesday and hyperscalar stocks in the red. The worries surrounding American Big Tech have spread globally, including Samsung, SoftBank, SK Hynix, and TSMC, which have suffered significant losses. Although equity markets recovered some of the losses on Friday and seem to have stabilized, they demonstrated investors’ nervousness around Big Tech, which raises the importance of analyzing the causes behind this nervousness.
Investor Nervousness
Markets are at an all-time high with valuations soaring past historical averages – the average P/E ratio of the S&P 500 is past 30 compared to a historical average of 25 – and an unprecedented concentration of capital allocated to individual stocks as Apple, Nvidia, Amazon, Alphabet, and Meta make up over 30% of the S&P 500. Marija Veitmane, global head of equity strategy at State Street Markets, explained in a Financial Times article that this environment can cause investors to be highly sensitive to adverse headlines. It is a time when people are torn between trusting fundamentals and the fear of losing out on a potential AI revolution.
Moreover, during the US government shutdown, which has recently been resolved, government agencies stopped publishing key economic data, such as inflation and the job market, which added further uncertainty to already tense markets. The sentiment around the Fed meeting in December has also shifted from an almost certain quarter-basis point cut to being currently priced in bond markets at a 50% chance. These current market conditions partly explain investors’ nervousness, especially as they seek to lock in the gains made from rallying equity markets this year.
Elevated CapEx and Costs
At the third-quarter earnings calls, Big Tech announced a significant increase in capital expenditure to investors as they are burning through cash to expand their AI infrastructure and computing capability. Morgan Stanley Research projects their capital expenditure to amount to over $600bn in 2026, where Meta, Alphabet, Microsoft, and Amazon alone are expected to spend $100bn, $107bn, $104bn, $122bn, respectively. Investors seem to be most concerned with Meta and Oracle, as their stock has been falling since the last earnings call.
What distinguishes Meta from its peers is that they are not building data centres to provide third parties with computing power through leasing, but exclusively for their own AI models. Consequently, forecasting their revenue increase from the data centres under construction is subject to greater uncertainty, as it does not directly benefit their main business model of advertisement and social media. Mark Zuckerberg talks about superintelligence, but he has not expressly discussed a potential backup plan. Analysts have also projected Meta’s free cash flow to decrease next year due to increased operating expenses from growing costs of running and renting computing power. Although the other tech giants face a similar challenge, their free cash flow is still projected to increase.
In addition to concerns of overcapacity and lack of application, investors worry over the costs of maintaining this elevated capital expenditure in the face of rising operating expenses. On the one hand, it regards the challenges with power and water, which are in short supply in the areas with the highest concentration of data centres. On the other hand, the technology employed has high depreciation due to its short life span, and constant innovation makes it rapidly obsolete and in need of replacement.
Rising Debt Levels
The stock sell-off last week spilled into bond markets as well as an index tracking hyperscalers’ debt by the Financial Times showed the spread – measured against the risk-free rate – rose to 0.78 basis points. To finance their capital expenditure, Big Tech issued over $180bn in corporate bonds this year, which amounts to one quarter of the net corporate bond issuance in the US. As their issuance is already substantial and only expected to rise, there is a risk of oversupply in debt markets, which can further widen the spread and increase the cost of debt.
In particular, Meta first procured $27bn from private credit for their Louisiana data centre and issued the largest bond since 2023 for a total of $30 bn last month. Oracle already faced backlash for entering the AI race later than its competitors and is now suffering from a significantly higher debt burden than its peers. S&P flagged multiple issues when reviewing their balance sheet, where the main concern is Oracle’s dependence on OpenAI. They signed a deal for $300bn to provide computing power to OpenAI, and a third of their revenue is projected to be tied to the ChatGPT-maker by 2028. Moreover, Oracle has an off-balance sheet commitment of over $100bn to rent AI infrastructure. A JPMorgan analyst suggested that a weaker credit rating and higher debt cost might prevent Oracle from growing its AI infrastructure at the desired rate.
US central bankers are casting doubts over rate cuts, with Kansas City Fed President Jeff Schmid explaining that “Inflation remains high, Job market cooling but remains in balance” and Boston Fed President Susan Collins, “relatively high bar for additional easing in the future”. The delay of interest rate cuts increases the interest rate risk for Big Tech and might further increase their cost of debt.
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