Moody's AI spending warning flags credit risk for tech hyperscalers

Moody's AI spending warning has put a sharper credit lens on the largest cloud and technology groups, as the ratings firm said the artificial intelligence buildout is weakening free cash flow and adding balance-sheet risk. Moody's Ratings projects capital spending by the companies it tracks will reach $785 billion in 2026 and about $1 trillion in 2027.

In a research note released Wednesday, Moody's said Microsoft, Amazon, Alphabet, Meta, Oracle and CoreWeave are raising large amounts of capital to fund data centers, chips and related infrastructure. The firm said the shift from software-led business models to heavier physical investment requires “unprecedented levels of investment and capital raising.”

The ratings firm said those funding choices, including debt issuance, equity sales and off-balance-sheet arrangements, “threaten credit quality” across the group. Moody's also said Microsoft, Alphabet, Amazon and Meta still have some of the strongest corporate balance sheets globally, making an imminent threat to their investment-grade ratings unlikely.

How does AI spending affect credit quality?

Credit quality reflects a company's capacity to meet its financial obligations, including debt, lease payments and other long-term commitments. Heavy AI infrastructure spending can pressure that capacity when cash is spent upfront while revenue from new services is expected over a longer period.

Moody's said the industry is moving away from the asset-light structure that helped large technology companies generate high margins through software, intellectual property and scalable cloud services. Generative AI requires data centers filled with costly servers and chips, along with substantial power needs, which changes the capital profile of the sector.

According to Moody's, direct debt across the six companies has reached about $460 billion. The firm also pointed to public market fundraising, including Alphabet's announcement last month of an $85 billion equity sale to expand AI infrastructure and computing capacity.

Data center leases add to future obligations

Moody's said hyperscalers are also using long-term data center leases to reduce the amount of direct debt reported on their balance sheets. Those arrangements can keep borrowings lower in a conventional accounting presentation, but Moody's said it treats the obligations as debt-like because they commit companies to future rent payments.

Lease commitments across the six-company group have risen to $1.2 trillion, Moody's said. More than $820 billion relates to leases that have not yet begun because the underlying data centers are still under construction.

The ratings pressure is more immediate for lower-rated companies in the group, according to Moody's. Oracle is rated Baa2 with a negative outlook, two notches above non-investment-grade territory. CoreWeave is rated Ba3 and operates in the high-yield market, with Moody's saying the company relies on complex private debt structures to finance fleets of graphics processing units.

Moody's points to circular AI demand

Moody's also raised concerns about what it described as circularity in the AI market. Some large contracted backlogs reported by hyperscalers are linked to strategic arrangements with artificial intelligence labs such as OpenAI and Anthropic, according to the firm.

In those relationships, large technology companies invest billions of dollars in AI labs, while those labs spend heavily on cloud services supplied by the same companies. Moody's said the overlap increases risk because major industry participants are becoming more exposed to the same customers and assumptions about future AI demand.

The ratings firm also identified offsetting strengths. It said demand for AI computing remains strong, cloud businesses continue to expand, and hyperscalers have signed hundreds of billions of dollars of long-term customer contracts that can support more predictable revenue.

Moody's said investors are likely to focus more closely on whether the companies can generate adequate returns on the capital being deployed. Its assessment points to a structural change in the financial profile of large technology companies as AI infrastructure becomes a central driver of spending.

This story draws on original reporting from CNBC.