Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Moody's AI Credit Warning Reshapes Tech Stock Picking
Transcript
- Lucas: So Moody's dropped a report yesterday that basically says the AI spending spree among the biggest tech companies is becoming a credit risk. They specifically called out Amazon, Meta, and Alphabet. Luna: Unprecedented was the word they used. That feels like a pretty strong warning from a rating agency. Lucas: Right. And these are all companies with triple-A or double-A rated debt, historically very safe. But the scale of the AI capex is just massive. I want to focus on Amazon because I think it's the most interesting case. Luna: Amazon's been spending like crazy on data centers for AWS and AI infrastructure. Their capex this year is projected to hit $75 billion. Lucas: Exactly. And they're funding a lot of it with debt. As of the latest quarter, Amazon had about $125 billion in long-term debt. Their free cash flow is strong, around $45 billion trailing twelve months, but it's volatile. Luna: So the concern is that if cash flow dips or interest rates go up, the interest coverage ratio gets tight. Lucas: Right now Amazon's interest coverage is around 11 times earnings before interest and taxes. That's healthy, but it's down from 18 times a couple years ago. And with the market now pricing in a higher chance of a Fed rate hike—oil prices are surging, the odds jumped after the latest CPI—that coverage could shrink further. Luna: But aren't these companies also generating enormous cash? Amazon's operating cash flow was over $90 billion last year. Lucas: Yes, but the gap between operating cash flow and free cash flow is widening because capex is growing faster than revenue. Amazon's revenue growth is still good, around 12 percent, but capex is growing at 30 percent plus. That's not sustainable indefinitely unless the AI investments start paying off quickly. Luna: That's the key question for stock pickers, right? When do we see ROI on all this AI spending? Lucas: And Moody's is basically saying, we're not sure it's coming fast enough to protect the balance sheet. Now, this doesn't mean Amazon is going to default. But a downgrade from Aa3 to A1 or something would increase their borrowing costs, which then pressures margins. And for a stock like AMZN trading at 232 dollars, any bad news on credit could ding the multiple. Luna: Let's contrast with Apple. Apple is spending on AI too, but they're much more conservative. Their capex is a fraction of Amazon's, and they have a net cash position. Lucas: Apple has over $60 billion in net cash. Their interest coverage is over 30 times. They could double their AI capex without breaking a sweat. So Moody's warning is really about the hyperscalers who are levering up. Luna: And that's exactly the kind of distinction we try to make on this show. It's not just about a growth story, it's about the financial structure underneath it. And on that note— Lucas: Go ahead. Luna: I think this is a good place to mention that we're able to do this kind of deep dive without any ads because of listeners who support the show. If you find value in these conversations, you can help keep them ad-free at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to back the kind of independent analysis that doesn't have to chase clicks or advertisers. It really makes a difference. And it's completely optional. Luna: Alright, back to the credit angle. So if I'm a stock picker looking at Amazon right now, what do I do? Do I avoid it because of credit risk, or is this an overreaction? Lucas: I think you have to watch the free cash flow trajectory. If Amazon can keep its capex growth in line with revenue growth over the next two quarters, the concern fades. But if they keep spending aggressively, you could see Moody's put them on negative outlook. Luna: What about Alphabet? They also have a lot of cash, but their debt has been creeping up. Lucas: Google has about $130 billion in cash and $25 billion in debt, so net cash. But they're also spending heavily on TPU infrastructure. Their interest coverage is still very high, so they're probably safe. Meta is the most interesting—they have no net debt, actually net cash, but their free cash flow has been volatile because of the Reality Labs losses. Luna: And Meta's stock is near $595, so the market is pricing in a lot of AI optimism already. Lucas: Exactly. So the Moody's warning is a reminder that credit ratings matter for equity valuations. When a company's debt gets downgraded, equity holders feel it through higher discount rates and lower terminal values. Luna: Let's talk about the Fed piece. You mentioned oil prices driving rate hike expectations. If the Fed does hike in September, that directly affects variable-rate debt and refinancing costs. Lucas: Right. The odds of a hike jumped to about 40 percent after the latest PCE data. And the ten-year Treasury is yielding around 4.6 percent. For a company like Amazon, every 1 percent increase in rates adds about $1.25 billion in annual interest expense, assuming their debt mix. That's not trivial. Luna: So the trade-off is clear: either the AI investments generate enough incremental cash flow to cover higher debt costs, or stocks reprice lower. Lucas: And that's why I think the next six months are critical. We'll see earnings reports from these companies soon. If Amazon shows that AWS AI services are accelerating revenue, the narrative stays intact. If not, Moody's might be the first of several downgrades. Luna: Do you think any of these companies could actually face a downgrade in the next year? Lucas: I think Amazon is the most at risk, ironically because they're spending so heavily on growth. But even a one-notch downgrade wouldn't be catastrophic. It would just increase their cost of capital. For stock pickers, it's a signal to pay attention to the balance sheet, not just the P&L. Luna: So the key takeaway: when you're picking individual stocks, don't ignore credit quality. Moody's is giving you a free analysis. Lucas: Exactly. And in a rising rate environment, it matters even more. The market is at all-time highs—S&P 500 around 7,412, Dow near 52,000—but the underlying risks are shifting. You want to own companies that can weather a rate hike and still invest. Luna: Well said. And that's what we'll keep digging into. The credit picture for mega-cap tech is one of the most underappreciated themes right now. Lucas: It really is. Thanks for listening, and we'll be back with another angle on stock picking soon.