Big Tech's AI-related debt reaches $350 billion and is heading to Europe.

      Big Tech established its reputation through vast amounts of cash, but it is now constructing its AI empire with debt, and the consequences are starting to appear in Europe. The five largest builders of AI data centers in the United States have doubled their debt over the past five years. According to Bloomberg’s compiled data, Alphabet, Amazon, Meta, Microsoft, and Oracle have accumulated around $350 billion in debt, banking on the hope that advanced AI will eventually yield financial returns.

      As it stands, the interest payments on this debt are nearly negligible. Collectively, the five companies paid about $10 billion in interest last year, which, although more than double what they paid in 2019, is minor compared to Google’s cash flow of approximately $64 billion in the last quarter. These firms remain among the most profitable in the world.

      However, signs of strain are beginning to emerge. Amazon reported negative free cash flow in the March quarter. Oracle’s debt has reached about 2.5 times its sales, and S&P downgraded its rating to just above junk status on Thursday due to AI spending concerns.

      The market is starting to show signs of anxiety. Thus far, investors have shown strong interest in the bonds, but this might be shifting. Amazon's $25 billion bond sale this week received a notably lukewarm response, marking the lowest enthusiasm for a hyperscaler launch since Meta's last October. Traders are offloading older tech bonds, including those from Amazon, Nvidia, and Oracle, to accommodate the influx of new bonds.

      Buyers are running out of capacity rather than confidence, but warning signs are proliferating. “Credit risk is currently undervalued in the market,” Morgan Stanley’s Vishal Khanduja mentioned on Bloomberg TV.

      Why this impacts Europe is significant. American tech companies have exhausted their dollar borrowing capacity and are now looking to Europe. Hyperscalers have not issued any non-dollar bonds in 2024, but by 2026, it will be a vital aspect of their funding strategy.

      Morgan Stanley predicts that their euro borrowing could hit €50 billion this year, as reported by TechFundingNews. This would position US Big Tech as the largest source of corporate debt in the eurozone, surpassing France. Alphabet has even borrowed in yen, Canadian dollars, Swiss francs, and sterling within just one year, and has issued a 100-year bond.

      As American corporations flood into the same euro-denominated debt that European startups and infrastructure funds depend on, the cost of borrowing will likely increase here as well. A startup in Munich or Paris that has no ties to AI could end up paying higher costs simply because Amazon entered the market first.

      While not everyone is anxious, Amazon CEO Andy Jassy expresses strong confidence in monetization. Mark Zuckerberg maintains that demand for computing power continues to exceed supply. Gil Luria from DA Davidson also believes the current debt load is manageable, stating, “If they were borrowing an order of magnitude more, that would be concerning.”

      Others, however, are more straightforward. Fitch’s Jason Pompeii remarked that it appears to be a considerable amount of demand hype that seems overly optimistic at this stage. A cautionary tale lies just across the industry. Intel accumulated debt for years but missed the AI chip surge entirely, requiring a US government bailout and investment from Nvidia to survive.

      Why this is significant is that the AI expansion has quietly evolved into one of the largest debt risks in corporate history, with one research firm predicting the AI debt market could reach $7 trillion by 2029. This year, only Alphabet’s stock has outperformed the market, while Microsoft and Oracle have both dropped over 20%.

      The share buybacks that previously characterized these companies have nearly ceased. The critical gamble now isn't merely whether AI will succeed but whether revenue will materialize before the debt becomes due, echoing the warnings of bubbles and the soaring valuations currently surrounding the sector. This is the same bet that fuels Nvidia’s bond sales and ByteDance’s borrowing.

      Europe has now become the arena where this risk will unfold.