Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How the AI Capex Race Is Creating a Credit Risk for Megacaps
Transcript
- Lucas: Okay, so Moody's dropped a warning on Friday that basically says the AI capex race is getting out of hand. They called the spending 'unprecedented' and said it threatens the credit quality of Amazon, Meta, Alphabet, and a few others. Luna: That's a pretty direct shot at some of the biggest names in tech. How bad are the numbers? Lucas: Well, look at the capex-to-free-cash-flow ratio. Amazon is spending roughly two and a half times its free cash flow on capex this year. Meta is close to two times. Alphabet is a bit lower, but still over one point five times. Those are levels you normally see in heavy industrial companies, not in what we think of as asset-light tech firms. Luna: Right, and Moody's is basically saying if the revenue from AI doesn't materialize fast enough, these companies could face a downgrade. Lucas: Exactly. And we're not just talking about a tick down in bond prices. A credit downgrade from A to BBB, or worse to high-yield, would ripple through their cost of capital, their stock buyback capacity, even their ability to do M&A. Luna: So let's talk about Amazon specifically. They're spending billions on data centers, custom AI chips, and they've got that massive capital lease for new facilities. Lucas: Amazon's capex this year is expected to top seventy-five billion dollars. That's up from about sixty billion last year. Their free cash flow has been improving, but it's still around thirty billion. So the math is tight. And the market seems to be pricing that in — Amazon stock is down about five percent from its high this month. Luna: Meanwhile, the S&P 500 is sitting at seven thousand four hundred twelve, near its all-time high. So the indexes are masking a lot of dispersion under the hood. Lucas: That's a really important point. The Dow is over fifty one thousand nine hundred, but the Russell 2000 is actually down half a percent over the last five days. Small caps are getting hammered while megacap tech — at least some of them — are still holding up. But even within megacap tech, you have to separate the ones that can actually fund this spending from the ones that can't. Luna: Microsoft seems like the one with the most breathing room. They've got a triple-A balance sheet, huge free cash flow, and their capex is more tied to cloud expansion that's already generating returns. Lucas: Yeah, Microsoft is the outlier. Their capex-to-free-cash-flow is under one times. They're spending a lot, but they're generating even more cash. That's why their credit rating is still pristine. Moody's warning specifically called out Amazon, Meta, and Alphabet — not Microsoft. Luna: It's interesting that oil stocks are quietly outperforming all of this. ExxonMobil at one fifty six point nine four, Chevron at one ninety four seventy nine — both up nicely this week while the Nasdaq is flat to down. Lucas: That's the rotation into value. The market is starting to reward companies with actual cash flow and low leverage. Exxon, Chevron, they're not spending crazy multiples of free cash flow. They're sending cash back to shareholders. And with oil prices ripping higher — the odds of a Fed rate hike just surged — these stocks look attractive. Luna: So for stock pickers, the question is: do you buy the AI spenders at a discount because the market is overreacting, or do you lean into value where the balance sheets are clean? Lucas: That's the debate. And we've seen this play out before — during the dot-com bubble, the companies that overspent on infrastructure without the business model to back it up got crushed. The ones that had real revenue growth and strong balance sheets survived and then thrived. Luna: If our money conversations have helped you think about a decision differently, we want you to know that we keep this podcast completely ad-free on purpose. No commercials, no sponsorships, just the research and the conversation. Lucas: That's a choice we made because we think your time here should be uninterrupted. If you find value in that and want to support the show, you can do it at buy me a coffee dot com slash fexingo. Luna: It's a simple way to help us keep going without selling out. And we appreciate it. Lucas: Alright, back to the AI spenders. Let's look at Alphabet. They're spending heavily on their TPU chips and data centers for Google Cloud. Their capex this year is around forty five billion, free cash flow about fifty five. So the ratio is manageable, but the problem is the growth in their core search business is slowing. Luna: That's the kicker. If search revenue starts to dip because of AI competition from ChatGPT and others, then their free cash flow could shrink, and suddenly that ratio looks worse. Lucas: Bingo. And that's why Moody's flagged them. Alphabet's cash flow generation is less certain than it was two years ago. Meanwhile, Meta is in a similar boat. They're spending thirty billion this year on AI infrastructure for their ad platform and the metaverse. Their free cash flow is around fifteen billion. So they're really stretching. Luna: And Meta's stock is at five ninety five, down from its highs earlier this year. So the market is already discounting some of that risk. Lucas: It is. But the question for a stock picker is whether the discount is enough. If you believe the AI investments will eventually drive revenue growth that justifies the capex, then buying at these levels could be smart. If you think the returns are years away, then the risk of a downgrade could send the stock down another ten to fifteen percent. Luna: And it's not just about the stocks, it's about the bonds too. The credit market is already starting to price this in. Spreads on Amazon and Meta bonds have widened a few basis points recently. Lucas: Right, fifty basis points wider on Amazon's ten-year bonds compared to the start of the year. That's real money. Amazon's cost of debt is going up, which makes all that capex even more expensive. It's a feedback loop. Luna: So for a concentrated portfolio, does it make sense to avoid these names entirely or to pick the one with the strongest balance sheet? Lucas: I think you have to be very selective. Microsoft looks fine. Apple, too — they're spending less on AI and have huge cash reserves. Apple's at three thirty three, and they're not even in the Moody's crosshairs. But Amazon, Meta, Alphabet — you need to watch their quarterly free cash flow numbers like a hawk. If one of them misses, the dominoes could fall. Luna: And what about NVIDIA? They're the supplier of the picks and shovels. Their stock is at two hundred six eighty four, and they benefit from all this capex regardless of whether the returns materialize. Lucas: True, but even NVIDIA has risk. If Amazon or Meta cut capex because of credit concerns, that flows through to NVIDIA's revenue. So it's not entirely insulated. But for now, NVIDIA is still the go-to for AI chips, and their earnings growth is stellar. Luna: So the takeaway for the listener is: when you're building a stock portfolio, you can't just look at growth rates. You have to look at how that growth is funded. Lucas: Absolutely. Balance sheet analysis is becoming just as important as the income statement. In a rising rate environment — and the odds of a Fed hike just surged — debt-heavy companies are vulnerable. The ones that can self-fund their growth and still generate free cash flow will be the winners. Luna: And the oil stocks are a good example of that. They're not growing fast, but they're generating cash and returning it to shareholders. That's a different kind of value. Lucas: Right. So whether you're in tech or energy, ask yourself: can this company sustain its spending without tapping the debt markets at higher rates? If the answer is no, you might be taking on more risk than you think. Luna: Good point. Maybe we should revisit this after the next earnings reports to see if any of these companies change their capex guidance. Lucas: I think we absolutely should. Some of those earnings are due in the next few weeks. It's going to be a critical quarter for the AI capex thesis.