Same AI trade, same problems

Subscribe to enjoy similar stories.The artificial-intelligence trade came roaring back to life this week, with the Nasdaq Composite closing at a fresh high on Thursday, marking 12 straight days of gains. Underneath the optimism, however, are some of the same concerns about circular finance that plagued the stocks at the start of the year.Those are valid concerns ahead of a flurry of Big Tech earnings reports due out next week, including Google parent Alphabet, Facebook parent Meta Platforms, Microsoft, and Apple.

Investors had gotten antsy about eye-watering AI bills, and they’re eager for any hint that massive spending is slowing—or at least evidence that companies are seeing returns on all that money.They’re right to be concerned, says a group of Morgan Stanley analysts led by Todd Castagno. While Big Tech companies have deep pockets, they don’t have infinite money, and most of their AI obligations are off-balance-sheet and opaque, since accounting rules often allow them to defer registering liabilities until triggers like delivery or lease commencements.“The lack of disclosure and contractual complexity of these arrangements makes it difficult for investors to interpret true economic leverage versus that reported on balance sheet,” Castagno’s team writes.

“The circularity of the AI ecosystem further complicates adequate analysis.”The stakes are undoubtedly high. Purchase obligations from hyperscalers and Nvidia have topped $640 billion, more than doubling in the past year and up six times in the past five years.