Let's discuss the impact of Blue Owl's withdrawal from Oracle's $10 billion data center project financing in Michigan, which was also a major reason for last night's sharp drop in US stocks. The market is concerned about whether the high capital expenditure and debt can be recouped, and also about the sustainability of future performance for chip manufacturers with large amounts of capital expenditure that lack the funds to support further investment. From a personal perspective, this is a continuation of the pullback logic discussed last week.
1. Weakening market sentiment leading to tighter private lending: Faced with Oracle's ever-increasing AI spending commitments and expanding debt, lenders are demanding stricter lease and debt terms. If risks are confirmed, lenders will withdraw directly.
New cloud vendors with high debt levels, such as Oracle, CoreWeave, and Nubis, will face this problem.
Meanwhile, the major tech companies in the Mag7 have relatively small debt levels, lower interest rates, lower interest expenses, and stronger cash reserves and cash flow generation capabilities.
2. There is also the issue of uncertainty in data center construction.
Various unforeseen events can occur during the approval and construction processes. Last week, CoreWeave experienced a significant drop in stock price due to a data center project being delayed by heavy rain.
For cloud vendors, delays mean delayed revenue recognition and accumulated interest payments. For chips, there may be sales delays, and large-scale computing power remains scarce.
3. A deeper look reveals that the concern stems from market sentiment rather than actual default risk. Oracle's current debt is $108 billion, with an additional $25 billion added in the past year due to data center investments. The remaining debt is long-term debt issued between 2015 and 2023. Annual interest expenses are over $4 billion, with over $10 billion in debt maturing in 2026. Oracle's operating cash flow over the past four quarters has been over $20 billion, covering interest expenses. The risk of default in the next two years is actually not significant.
4. What is the impact on the market?
As previously discussed, there have been many macroeconomic events recently, a period of high volatility, and negative issues surrounding key companies in the industry are further driving down valuations. I don't believe AI has reached a turning point yet, but as with all major industrial transformations, after a period of rapid expansion, the final battle will likely end in a winner-takes-all scenario where the losers lose everything.
Ultimately, companies with strong revenue growth, sound capital structures, and high efficiency will prevail. The AI sector is likely to see a reshuffling across different tracks, with capital flowing to these ultimate winners. Mag7 itself is a product of this evolving competitive landscape.
In the short term, we'll have to wait until this week's major events have concluded before making any judgments.
