Different perspectives

Global equity markets are suffering increased volatility recently, and the dynamic that explain that behavior is really interesting. On one end, we have the hyperscalers (Amazon, alphabet, Microsoft, Oracle etc), the behemoths that are investing trillions of dollars collectively into the AI space (data centers, models, etc). On the other, we have the chips companies (NVDA, Micron) that are the ones receiving those investments to produce the new gold: the chips that constitute the brain of AI. Take a look at the chart below: hyperscalers are down YTD, after running hot for several months now, and. Chip companies are flying. Why? Several reasons: (1) hyperscalers are running out of cash flow for the major investments they need to make to be competitive in the space. And to remain in the game, they’re issuing tons of debt, public and private, and equity. Investors don’t like that combo (less free cash flow, more leverage and more stock). (2) the accounting: when a hyperscalers buys a chip, it amortizes the purchase of that asset over 3-5 years, while chip companies reflect the full purchase amount on its books in the current month/quarter. Even though the money flow is the same, it is recognized in a different way. (3) the chip industry is so competitive, only 3-5 companies are really in the game, receiving the majority of those cash flows from companies all over the world. At some point in the not so distant future, we’ll see hyperscalers dialing down their investments, simply because they will not be able to produce enough money, organically or through markets (debt and equity) to maintain the current rate. That’s what the chart reflects. Furthermore, chip companies will receive less money and will grow less, which will inevitably adjust their valuations, and their price. The volatility reflects the different perspectives on the timing of this issue.

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