BRAND NEW EPISODE: AI’S DEBT FUELED GROWTH
The AI boom is being financed with debt—and the numbers are staggering. The world’s biggest tech companies are spending hundreds of billions of dollars to build the infrastructure behind artificial intelligence. But while investors focus on the stocks, Brian Carney, Portfolio Manager at Mawer Investment Management, is watching the credit markets—and he sees risks most investors are ignoring.
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Here are five things to know today:
Buckle up: Stocks are a mess this morning, led lower by tech stocks after the Korean market plunged 10% yesterday. Sure, it is still up 95% so far this year, but today the air is coming out of the tech trade – particularly the semiconductors. The catalyst was a report that SK Hynix was slowing down production of AI memory chips sparking concerns that demand was slowing down. The move is less about that report, and more about positioning and leverage. It doesn’t take much to topple a market in which investors have accumulated record margin debt. Speaking of debt, I encourage everyone to check out today’s timely episode about the scale of the hyperscalers debt-fueled growth ambitions. We spoke with Brian Carney, manager of the Mawer Credit Opportunities Fund, who pointed out that Alphabet has borrowed $90 billion over the last 12 months which is the size of the entire corporate bond market in Canada. He explains why he is being selective and not willing to take bets longer than 5 years.
Night owl: Alimentation Couche-Tard reported better than expected sales, profit and margins than expected last night. Sales inside the convenience stores was much better than expected in the US and Europe, while they unexpectedly fell in Canada. Fuel margins, not typically rewarded by the market, also came in better than expected. There was uncertainty about how higher fuel prices was going to affect the business heading into the quarter. US sales growth is a big bright spot with sales up 3.4% compared to 2.5% expected. It is the best pace of growth there in the last three years, highest margin in 10 years, and better than rival 7-Eleven over the same period. Questions came up on the conference call about why no buybacks given “squeaky clean” balance sheet. The response was somewhat canned, but said the priority was organic growth and pursuing M&A opportunities while maintaining our debt levels within certain targets. Later though, the CEO said “we are in very volatile times” which is why they have elevated cash on their balance sheet.
Big blue: Shares of IBM are popping 5% after announcing a program partnership with OpenAI and getting an upgrade at JP Morgan. IBM said it is joining OpenAI’s Daybreak Cyber Partner Program which uses some of OpenAI’s cyber capabilities to their enterprise customers. Shares have been under pressure – dropping 24% from the beginning of June. JP Morgan is swooping in here, saying the stock is now a buy on greater software acceleration in the second half of the year. Take a step back, the analyst notes that IBM has spent the last 10 years moving from a hardware company to a software-led platform with that part of the business now 45% of the revenue. As the main driver of the stock, the call is predicated on software picking up.
Feed the ducks: AMC shares are plunging 22.6% after announcing plans to raise $200 million by selling stock. Funds will be used to pay down debt and for general purposes. The theatre chain is attempting to take advantage of a recent rally in the stock with shares up more than 70% so far this year and comes after a strong weekend at the box office thanks to Toy Story 5. The meme stock remains a shell of its former self down 99% from the peak in 2021.
Rare earth deal: Uranium and rare earth miner Energy Fuels is buying German magnet group for nearly $2 billion. The deal is part of their mine-to-magnet supply chain plans. Energy Fuels wants to produce commercial scale rare earths and recently secured a $725 million loan from the Department of Defense.
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