Moody's Warns AI Investment Boom Pressures Tech Giants' Financial Stability; Free Cash Flow Under Pressure for Companies like Microsoft (MSFT.US) and Oracle (ORCL.US)

According to Zhitong Finance APP, as global tech giants compete to expand their artificial intelligence infrastructure, Moody's Ratings has warned that the AI investment boom is eroding the free cash flows of major cloud service providers and increasing balance sheet risks. In the future, investors will be more focused on whether these companies can achieve sufficient returns from their massive AI investments.

In a research report released this week, Moody's stated that six tech companies, including Microsoft (MSFT.US), Amazon (AMZN.US), Google's parent company Alphabet (GOOGL.US), Meta (META.US), Oracle (ORCL.US), and CoreWeave (CRWV.US), are shifting from a previous "asset-light" business model relying on software, intellectual property, and cloud services, to an "asset-heavy" model that requires large-scale infrastructure building such as data centers.

Moody's pointed out that this transformation requires unprecedented amounts of capital investment and financing, and may weaken the credit quality of these firms.

The agency anticipates that AI infrastructure investment will continue to surge, with capital expenditures by the six companies expected to reach around $785 billion in 2026, and further approach $1 trillion by 2027.

The report notes that compared to traditional software businesses, generative AI requires significant investments in data centers, GPU servers, and high-performance chips, resulting in a fundamental change in the technology sector’s long-standing high-margin, asset-light operating model.

To support AI expansion, the aforementioned tech giants are relying increasingly on capital market financing.

According to Moody's data, the total direct debt of the six major cloud service providers has now risen to about $460 billion. At the same time, these companies are continuously raising funds from the capital markets, with Alphabet last month announcing an $85 billion equity financing plan.

In addition to debt and equity financing, more and more companies are also using off-balance sheet financing to reduce balance sheet pressure.

Moody's stated that, as AI hardware and infrastructure require huge upfront investment while the associated revenue cycle is relatively prolonged, the industry as a whole is experiencing ongoing pressure on free cash flow. To avoid direct debt increases, tech giants are extensively employing long-term leasing of data centers and other financing measures.

To date, data center leasing commitments for the six companies have now reached about $1.2 trillion, with more than $820 billion corresponding to projects that are still under construction and not yet operational.

Although such leasing commitments do not show up as conventional debt on balance sheets, Moody's believes they are essentially long-term liabilities equivalent to debt, and will result in substantial future rental payment obligations.

However, Moody's believes that Microsoft, Alphabet, Amazon, and Meta still possess some of the strongest corporate balance sheets in the world, and the likelihood of their investment-grade credit ratings being affected in the short term is low.

In contrast, companies with lower credit ratings face greater pressure. Oracle is currently rated Baa2, with a negative outlook, just two notches above junk status; CoreWeave, focused on AI cloud computing services, is rated Ba3, in the high-yield bond category. Its GPU infrastructure is mainly backed by complex private debt financing structures.

In addition, Moody's notes that the current AI industry chain is forming an increasingly obvious "circular ecosystem."

The report indicates that in recent years, major cloud service providers have invested billions in AI startups like OpenAI and Anthropic. These AI companies, in turn, purchase massive amounts of cloud resources from Microsoft, Amazon, Google, and others, creating a mutually dependent cycle of capital, customers, and infrastructure.

Moody's says that such cross-shareholding and client relationships mean industry leaders are becoming increasingly dependent on the same group of AI customers and on continued growth in future AI demand—a shared assumption. If industry demand falls short of expectations, related risks could be amplified simultaneously.

However, the agency believes that current AI computing demand remains robust, cloud services continue to grow, and the large cloud providers have signed long-term client contracts worth hundreds of billions of dollars, providing strong revenue predictability. As such, overall credit conditions remain sound.

Moody's points out that, going forward, investors will increasingly focus on whether tech companies can turn surging AI capital expenditure into adequate returns, signifying that the technology sector is undergoing the most profound financial structure transformation since the advent of the cloud computing era.