Good afternoon. This is your midday market update from City AM.
Another day, another AI sell-off.
Yesterday it was the turn of Facebook-owner Meta, which saw its shares tumble seven per cent. The stock has shed an eye-watering $250bn in value over the past month.
Meta’s slide came after the company upped its capex forecast once again. The firm now expects to spend between $135-$145 this year, an increase of $5bn to the bottom end of the forecast range, which it said was needed to turn its Muse AI agent into a commercial success.
Investor concern over Meta, and other AI-adjacent stocks, is two-fold. The first is that growing levels of spend is eating away cash resources, weakening firms’ balance sheets.
The tech giant’s third-quarter earnings showed free cash flow, a measure of surplus cash generated after covering costs, was in negative territory for the first time in over a decade, while its total debts have almost doubled in the space of two years.
The second is that so many firms are adopting the same resource-heavy, debt-loading strategy, there simply isn’t enough capital to go round for everyone.
Nvidia’s boss Jensen Huang put the succinctly at a conference in Berlin yesterday:
“If you look at the fundamentals, the demand for the neo clouds is off the charts.
“What is missing in the middle is the working capital to fuel that growth… because there’s just so much demand across so many sectors of AI, there’s a scarcity of capital.
“The demand of the capital is much greater than the availability of the capital. That’s going to get solved.”
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Entering the next phase
Quite how that gets “solved” is what lingers in investor minds. On the one hand, more cash could become available if the investment case strengthens. On the other, some firms could simply start running out of cash before AI projects become viable.
The fact that Meta’s credit default swaps – a type of derivative used to insure against exposure to default risk – reached record highs yesterday, could offer one indication of which direction people think the market is heading.
As the Wall Street Journal points out, even though more than 10m North Americans have downloaded Meta’s Muse, “its growth and monetization would need to kick into a different gear” if it stands any chance of making money for the company.
Even if it hit 100m paying users as soon as next year, that would only make Meta $24bn, about an eighth of its planned capital spend over the same period. Something doesn’t add up.
For the past couple of years, the explosion of interest in AI has been a rising tide that has lifted all boats. But the market might soon be entering its next phase: picking the winners and losers.
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