The infinite (AI) game

The race for Artificial General Intelligence is taking some unexpected turns. The infrastructure needs to be able to train the models and grab market share, implies massive capital expenditures. Whether you call them magnificent 7 or hyperscalers, the big tech megacap companies have committed a big percentage of their revenues to make sure they remain in the race. They all understand the AI race is an infinite game, where there are no explicit rules and no timeframe; the only way to “win” an infinite game is to remain the game. The way to lose, is to abandon the game, forced by your inability to remain in the game. It appears that’s starting to happen. In the chart below, you can see the credit default swap for Oracle, the leader in database software, and the company’s quarterly free cash flow on a 12 month basis. Oracle’s ambition to remain in the game, has forced them to take an incredible amount of debt to be able to build the data centers for Open AI (for the most part) and they’re now realizing they have a huge mismatch between the potential revenues from their investment and the cost associated with it. And they’re not the only one. They’re just the obvious first one. The stress on these big companies balance sheet and income stament is going to have a spillover effect on the whole credit market. As of today, AI related Investment grade debt accounts for 15% of the total corporate debt market , and 10% of the new issuance. If this pace is maintained, it is estimated that in 5 years, it will be 20% of the total. It’s interesting to recall that, at its peak, during the 2000’a, the auto industry accounted for 8% of the total corporate debt pool, and its debacle in 2008 bankrupt the two major companies. This is another layer of concentration for this market.

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