Economy 4 min read By Bethany Hadley
AI firms face capital squeeze as lenders and investors pull back
Wall Street is nearing the limit of how much money it will lend to AI companies, with OpenAI cutting its funding target and S&P Global lowering its outlook on Meta.
Wall Street is reaching the limits of how much capital it is willing to supply to the artificial intelligence sector, adding a new constraint to a boom already strained by shortages of chips, materials and other physical inputs. Technology giants have also been running short of political goodwill as voters push back against the rapid expansion of data centres.
The clearest sign of tightening came from OpenAI, which reportedly cut the target of its latest funding round to $20 billion from $30 billion, according to the Financial Times. The company had secured about $11 billion in commitments, less than half its original goal, the Wall Street Journal reported. Separately, the credit rating agency S&P Global revised its outlook on Meta to “negative” from “stable” late on Friday, citing negative cash flow and uncertainty over its capital expenditure plans.
Lenders are also signalling caution. The head of technology, media and telecom lending at a large European bank told Bloomberg last week that the institution was approaching the limit of what it could lend to the sector, given its sizeable exposure. Yet the latest earnings reports suggest the largest cloud providers still intend to spend heavily. A handful of hyperscalers are expected to invest $800 billion this year and more than $1 trillion next year, a combination that has sent their share prices tumbling.
Market veterans have begun to question whether enough money exists to fund those ambitions. Wall Street strategist Ed Yardeni pointed to a series of warnings in a note last week. Broadcom chief executive Hock Tan said capital could become the biggest constraint on AI. BlackRock chief executive Larry Fink described the competition for capital as the fiercest he had seen in his career. Nvidia chief executive Jensen Huang said demand from neocloud providers was “off the charts” while capital remained scarce.
The financing gap is set to widen because AI businesses are not yet able to pay their own way. Market research firm Gartner estimated that data centre owners will need $8.5 trillion in cumulative revenue by the end of the decade to justify their investments. Data centres are expected to generate no more than $3.6 trillion of enterprise and consumer AI revenue by then, leaving a substantial shortfall that must be met by borrowing or equity.
Companies are already returning to markets. On Monday, Oracle said it planned to raise $20 billion by issuing stocks and bonds. Elon Musk said SpaceX had closed $40 billion in debt financing, Meta announced plans to raise $95 billion in equity, and Microsoft raised $25 billion in debt. Meta itself acknowledged an “increasingly challenging environment for raising capital” in a recent filing, and its board said it would be prudent to raise funds before more companies absorbed the available capital.
Not all borrowers face the same conditions. Analysts at Bank of America said last week that capital remained ample for investment-grade firms and for projects backstopped by suppliers, although such “circular” arrangements have attracted greater scrutiny. The bank sees positive leading indicators for AI chipmakers into next year, suggesting that Wall Street may become more selective, financing well-qualified borrowers while shutting out weaker ones.
Demand for capital is also coming from outside the technology sector. The federal government ran a deficit of nearly $2 trillion in the last fiscal year, with no sign of that spending slowing, adding further pressure on the bond market. Apollo chief economist Torsten Slok told CNBC last month: “All those things combined basically means that at the moment we have a shortage of capital, and we have an abundance of good ideas that we need to invest in.”
Source: fortune.com
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