Meta, the parent company of Facebook, has recently taken a significant step in financing its aggressive pursuit of artificial intelligence (AI) development by raising $30 billion in debt. This move comes amidst a backdrop of disappointing quarterly earnings that led to a notable decline in Meta’s share price, which fell more than 11 percent during trading hours.
Despite the drop in stock value, demand for Meta’s bonds was reported to be four times greater than the available supply. Analysts suggest that the tremendous interest in Meta’s debt signals strong investor confidence in the company’s long-term prospects, even as concerns around its spending emerge. Angelo Zino, a senior equity analyst at CFRA Research, pointed out that while Wall Street may be apprehensive about CEO Mark Zuckerberg’s spending habits, the firm’s substantial revenue—exceeding $100 billion annually—provides reassurance regarding the repayment of its debt.
The debt, expected to be repaid over several decades, is earmarked for sustaining Meta’s rapid pace in AI innovation. As larger tech firms increasingly pivot to debt financing to support their ambitions in AI, Zino speculated that rivals like Google and Microsoft might also consider similar borrowing strategies in the near future.
Byron Anderson, head of fixed income at Laffer Tengler Investments, noted that the surge in investor interest for Meta’s bonds reflects a desire to include high-quality entities in investment portfolios amid high demand for bonds, despite current low interest rates. He dismissed the idea that the demand was fueled by “fear of missing out” on the AI boom. Instead, investors appear to be looking for reliable names, with Meta being likened to industry stalwarts such as Oracle.
Oracle recently raised $18 billion through a bond offering and is expected to issue an additional $38 billion via bank loans. In times of lucrative cash flows, companies like Meta and Oracle are now finding favorable conditions in debt markets, especially as the U.S. Federal Reserve has reduced borrowing costs.
The nature of debt taken on by established AI firms is typically secured by tangible assets, such as data centers and GPUs, which are essential for AI operations. This lowers the risk for lenders and mitigates concerns over a potential AI bubble. Meanwhile, younger AI firms like OpenAI or Anthropic, which are still working toward profitability, face challenges in accessing such favorable debt terms. According to Anderson, these startups often resort to raising funds through equity rather than incurring debt, which would be cost-prohibitive given their financial status.
In a recent announcement, Meta revealed a collaboration with asset manager Blue Owl Capital aimed at generating $27 billion for the construction of new data centers, further underscoring its commitment to expanding its AI capabilities. The strategic moves made by tech giants like Meta illustrate a growing trend of leveraging debt in the race to assert dominance in the evolving AI landscape.
