Moody's says AI spending puts Big Tech credit quality under pressure

Moody's AI credit quality warning puts a new lens on Big Tech’s spending race: the companies building the backbone of artificial intelligence are taking on more financial risk to pay for it. For retail investors, the point is not just whether AI demand is strong, but whether the returns can justify the cost of data centers, chips and power.

Moody’s Ratings said in a research note this week that the AI buildout is reducing free cash flow and adding balance-sheet risk at major hyperscalers, a term for cloud giants that operate computing infrastructure at vast scale. The ratings firm reviewed six companies: Microsoft, Amazon, Alphabet, Meta, Oracle and CoreWeave.

According to Moody’s, the shift from software-heavy business models to infrastructure-heavy AI operations has changed the funding needs of some of the world’s largest technology companies. Moody’s said these firms once relied more on software, intellectual property and cloud services that required lower capital investment, while generative AI requires far more physical infrastructure.

How does AI spending affect credit quality?

Credit quality is a judgment about how likely a company is to meet its debt obligations. When a company spends heavily, borrows more or commits to large future payments, ratings firms may view its financial cushion as thinner, even if the business is still growing.

Moody’s said capital expenditures across the companies it tracks are projected to reach $785 billion in 2026 and about $1 trillion next year. Capital expenditures, or capex, are long-term investments in physical assets such as data centers, servers and networking equipment.

The ratings firm said direct debt across the six companies has climbed to roughly $460 billion. Moody’s also pointed to stock sales and financing structures outside traditional balance-sheet debt as tools companies are using to fund AI expansion. Alphabet announced last month an $85 billion equity sale tied to expanding AI infrastructure and computing capacity, according to the company announcement cited by Moody’s.

Why leases matter for AI data centers

Moody’s said hyperscalers are also using long-term data center leases to keep some obligations from appearing as direct debt. These arrangements can still act like debt because they lock companies into future rent payments.

Lease commitments across the group have reached $1.2 trillion, according to Moody’s. More than $820 billion of that amount is tied to leases that have not yet begun because the related data centers are still under construction.

The ratings firm said the timing creates pressure: AI infrastructure requires large upfront spending, while revenue may arrive over a longer period. That gap can weigh on free cash flow, which is the cash left after operating expenses and capital spending.

Which companies face the most pressure?

Moody’s said Microsoft, Alphabet, Amazon and Meta still have some of the strongest corporate balance sheets globally. The firm does not view their investment-grade ratings as facing an immediate downgrade risk, despite tighter cash flow and smaller borrowing cushions.

The pressure is more concentrated at lower-rated companies. Moody’s rates Oracle at Baa2 with a negative outlook, two notches above junk status. CoreWeave is rated Ba3, placing it in the high-yield market, and Moody’s said the AI cloud company uses complex private debt structures to finance its GPU fleets.

Moody’s also flagged what it called circularity in the AI economy. Some hyperscaler backlogs are tied to strategic deals with private AI labs such as OpenAI and Anthropic, according to Moody’s. The firm said large tech companies have invested billions in AI labs that then spend heavily on cloud services from some of the same companies.

That overlap can increase risk if the same customers and the same demand assumptions support much of the industry’s growth story, Moody’s said. At the same time, the firm said strong AI computing demand, growing cloud businesses and long-term customer contracts help support the sector’s credit profiles.

Moody’s summed up the investor issue directly: “Investors will increasingly focus on these companies’ ability to realize an adequate return on investment.”

This story draws on original reporting from CNBC.