How Big Tech’s Debt Machine Is Powering the AI Boom

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1:42Today's number? 25. That is the percentage of ants that never do any work for the colony. Scientists have yet to figure out why these ants don't work, but they have identified one trait that they all have in common. They're all in consulting.

2:02Money market's mad. If money is evil, then that building is hell. The show goes on! The folks are never watching. So, so. Welcome to Prof. G Markets. I'm Ed Elson. It is November 19th. Let's check in on yesterday's market vitals. The major indices all declined as the tech sell-off continued. The S &P 500 fell for the fourth day in a row to its lowest close in a month. Meanwhile, the yield on 10-year treasuries slid, and finally, Bitcoin dipped below$90 ,000 before recovering marginally. OK, what else is happening? Home Depot shares dropped after reporting third quarter earnings yesterday. Revenue slightly beat expectations, but the company missed on earnings per share.

2:47The retailer also cut its full year guidance. earnings for 2025 are now expected to fall 5 % instead of previous projections of 2%. The stock closed down 6 % yesterday. So why do we care? Well, Home Depot can tell us kind of a lot about how the American consumer is doing. Its results are also closely tied to the housing market. And on top of that, the company is relatively exposed to the tariff. So to help us break down what these earnings tell us about the broader economy, we are speaking with Joe Feldman, Senior Managing Director at Telsey Group. Joe, thanks for joining us. Thanks for having me.

3:26Excited to chat with you. So we want to get your reactions to these earnings. Beat on revenue, missed on EPS, stock fell 6%. Take us through what happened with these Home Depot earnings. So I think what happened was expectations were a lot higher heading into the print. really self-induced by Home Depot. If you go back a quarter, they saw some momentum in the business. They had a better spring, early spring, summer period. And they thought the second half of the year was going to be even better. They thought there would be continued momentum. So we in the street all expected higher sales trends coming into this quarter.

4:08And then when the quarter materialized, it didn't happen. Basically, the consumer stayed kind of stable. So their underlying business stayed stable at around a 1 % growth in terms of comp. But there was some pressure because of the lack of storm activity. Usually, hurricanes are a good thing for Home Depot, for Lowe's. And when that didn't happen, it caused further pressure on sales. Then the margins started to deteriorate a little bit. And you saw some deleverage. And so the earnings came a little frustrated with what happened. Can you tell us more about how hurricanes relate to profits at Home Depot?

4:46It's a strange thing in the business, but it is important. Yeah, no, it's very important actually in the third quarter and sometimes in the fourth quarter where big storms can have a big impact. Because when a hurricane comes and there is some destruction related to it or tornadoes and other storms, you know, houses need repair. Roofs might get damaged. Gutters might get damaged. And so when that happens, the consumer usually comes back in force in that region soon after the event to try to repair their homes. This time around in the third quarter of 2025, we didn't really have any major storms like that compared to two last year late in the quarter around October.

5:27And those storms had a big positive boost to Home Depot, Lowe's, Tractor Supply late in the quarter a year ago in their fourth quarter. So now when you look ahead and you don't have any storm activity or recovery activity to happen, that's going to put some extra pressure on the sales. Yeah, so interesting. Aside from the hurricanes or the lack thereof, which was interestingly a bad thing for the company, was there anything else? Was there anything that we learned about the consumer, perhaps? I mean, I feel like Home Depot is generally considered to be like a bellwether for how the consumer is doing.

6:07Did that play a role in these earnings here? You know, I think the consumer was definitely front and center. And it's always a much talked about topic, as you said, with Home Depot as a bellwether. And their consumer is actually pretty healthy. It was interesting. Now, you may not think that when you look at the sales trend. However, big ticket sales were actually up a couple of percent. That would imply that people, when they do go to shop, they're opting for new innovations, newer products, things that may have advanced technologies within them. I'm thinking of appliances and power tools and things like that, where they are stepping up.

6:44So that would imply that the consumer has the money to spend. The homeowner, by definition, tends to be a bit more affluent just because to own a home you need to be. And so I think they're seeing resilience among their consumer. It's just they're not seeing people, you know, digging in deeper to go after bigger projects like a bathroom remodel or a kitchen remodel. And that's really what's causing the pressure. The day-to-day repair and maintenance is happening. And that's why I said earlier that the business is relatively stable because that underlying core business is fine. And we're seeing consumers spend and shop.

7:19It's just that incremental spend is not happening because that otherwise considered discretionary within the home improvement space is not happening because people are just a little bit more cautious. Maybe they're waiting for rates, interest rates to come down a little more to finance some of these projects. And, you know, home values are still up. But with lack of housing turnover, there's also some pressure there. Usually people will do some extra work to clean up the house before they sell it or soon after they buy it. And with the lack of turnover, that hurts as well. So broadly speaking, the consumer is somewhat resilient.

7:54They're spending. It's just that they're not spending beyond what they need to spend on the day-to-day maintenance. Have tariffs played a role in the story here? I mean, Home Depot, I believe it imports quite a lot of its inventory. Have tariffs had any effect on the business? You know, so far tariffs have not had a significant effect at Home Depot, nor at Lowe's. I mean, we'll hear from Lowe's tomorrow. But I think what we've seen is that the tariffs, you know, over half of what Home Depot buys is domestic. So, you know, a little less than 50 percent is imported. Those goods, there are tariffs on.

8:34They've been able to mitigate a lot of the tariffs through negotiations with suppliers, through cost controls on their own end, maybe operating it more efficiently. And there has been selective pass-through. They've not really seen much pushback on the pricing pass-through that they've had to do. It's not been too dramatic. You do see it in appliances, power tools, things like that, that come out of China or other parts of the world. But, you know, broadly speaking, tariffs were not a major impact in this quarter. Yeah, but they are increasing prices and they are saying that it's because of the tariffs.

9:11In other words, it's impacting the consumer at least a little bit. Yes, I think broadly, yes, to expand beyond the Home Depot story, you're absolutely right. The consumer is very much feeling the impact of tariff related price increases. There's no question about that. And I think the Trump administration response on food the other day really reflects that. You know, I assume when we hear from Target and Walmart later this week, we're going to hear that tariff pressure is there. It's real. It's causing consumers to have less discretionary dollars. It's causing consumers to be a little sharper and tighter with how they spend.

9:46They're seeking out more value. So yes, broadly, the consumer is definitely being impacted by the higher prices that are starting to flow through. And it's really just starting because if you consider when the tariffs really did jump up a little bit, inventory that's now hitting the stores for this holiday season and into next year, that's the tariff inventory at the higher tariffs that are in place today. Right. Yeah. Just before we let you go here, what did we learn about the guidance? I mean, is there anything that the guidance for Home Depot could tell us about the economy at large? I mean, can we learn anything from these earnings about what will happen either on tariffs or on anything else going forward?

10:31Yeah, I think the guidance from Home Depot reflects the fact that the macro, more specifically the housing market, is still rather sluggish. And we're just not seeing that pickup that we would have expected to see at this point. Now, we are seeing a more stable housing market, and the turnover is running at around$4 million at an annual run rate. Four million units are turning over. But we need to see it higher. We want to see it higher. And I think Home Depot wants to see that. They also want to see lower interest rates that would help people to finance projects. So I think their guidance shows that caution that we're just not getting that incremental lift from the industry that we would like to see at this point.

11:12I do believe Home Depot is taking market share. reflected in their current business. I mean, it was positive sales. They generated$40 billion, $41 billion of revenue in the quarter. But to go forward, I think there's going to be some caution in 2026 as well. Tariff-related pricing pressure on the first half of the year on the consumer is going to continue to weigh on things. And so you may not see this sharp rebound in the first or second quarter. We're hoping spring, so maybe second quarter, you'll start to see a little bit of a lift, but it still looks like we're going to see more of the same for the next couple of quarters.

11:48All right. Joe Feldman, Senior Managing Director at Telsey Group. Thank you for joining us. Really appreciate your time. My pleasure. Thanks for having me. After the break, big tech embraces debt. If you're enjoying the show, give Prof G Markets a follow.

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15:23We're back with Profit New Markets. What's the hot new trend in AI right now? Raising a lot of debt. This week, Amazon raised$15 billion in its first US dollar bond offering in three years. It's not alone. Google sold$25 billion worth of debt in the US and Europe earlier this month. Meta issued$30 billion of corporate bonds in October. Meanwhile, Oracle is already carrying$104 billion in debt, and it is lining up another$38 billion. All of this spending adds up. These deals have contributed to a record$6 trillion in global debt issuance this year. In sum, big tech is now financing the AI boom with borrowed money, just as investors are starting to question how and when this AI build-out will actually pay off.

16:12So, here to explain the role that debt is playing in the AI boom, we are speaking with Robert Schiffman, Senior Technology and Internet Credit Analyst at Bloomberg Intelligence. Robert, thanks for joining us on Prof G Markets. How are you doing, Ed? Doing very well. Thank you for being here. Awesome. So, a lot of big tech debt headlines in the news recently. Amazon raising$15 billion. We saw Google raise$25 billion. meta raised 30 billion uh these seem like very big numbers but for those of us who are you know less familiar with the debt markets um how big are these numbers really why are we seeing them um and why why do they all seem to be happening kind of at the same time or at least in the same month yeah it's even bigger than what you said because oracle did 18 billion dollars of public debt, and they're looking to do$38 billion of private debt.

17:08Meta did another$27 billion of off-balance sheet debt. So we're actually in a record year for debt issuance, public and private. And it's a little bit of a question of if we build it, will they come when it comes to AI? I actually think it's the other way. I think the demand has come. So these companies are building it. And the reality is this is just the early stages. There is a lot more spending to go. I think we're going to see hundreds of billions of dollars of debt over the next few years because we're likely to see$3 trillion of AI cap spending cumulatively from probably a handful of the largest hyperscalers through 2030.

17:52So those names you mentioned there, these are all companies that generally speaking already have quite a lot of cash on the balance sheet. You'd kind of think that if you're Google or you're Meta or you're Amazon, that you don't need to borrow money. Do they need to borrow? I mean, do they not have enough cash already to just finance this themselves? Yeah. Listen, the old adage in the bond markets are you borrow money when you can, not when you have to. And right now, the market is still ripe for lending. If you can take down 10-year money with a four-handle on it, so a 4 % coupon, you're going to do that all day long.

18:32You can borrow 30-, 40-, 50-year money with a five-handle on it. You're also going to do that. But the reality is they have enough money today that if they didn't want to borrow another dime, they could probably get away with it. But what it would do is it really pulls resources away, pulls financial flexibility away. Because most of these companies, other than Amazon, are also spending$30,$50,$70, in the case of Apple,$100 billion a year on shareholder returns. So how do you do everything is really the question. And this enables borrowing money, enables them to both invest organically, continue to do M &A and pay significant dividends and share buybacks.

19:15Over the next couple of years, some of the companies like Ameta are going to be spending more money than they're pulling in. If they continue on a shareholder return path they've been on. So they actually do need money. Others like an Oracle, which are triple B rated, are just flat out free cash flow negative. They're spending a lot more than they're bringing in. So it's a little bit idiosyncratic, but remember for years, most of these companies, whether it's Meta, Google, Amazon, Microsoft, they've been very conservative in terms of their balance sheets, AA balance sheets, AAA balance sheets, 50, 75, a hundred billion dollars in cash.

19:49They've been setting themselves up for an opportunity like this. So they position themselves very well. That being said, borrowing money today makes a pretty good argument that they're going to spend a lot more money tomorrow. You mentioned that there's this question of, if we build it, will they come? You said that you think the demand already is there. I think the AI bears would say, well, yes, there's demand, but it's all kind of circular. It's all coming from the same people. I mean, OpenAI wants to buy compute, but, you know, NVIDIA, they're the ones who have been investing in OpenAI, and then OpenAI takes their money and spends it over at Oracle.

20:31In other words, the demand is artificial to the people who are worried about that prospect. What would you say to those people? Yeah, there's been a lot of incestuous type of investing here. That doesn't mean that true third-party demand doesn't exist. I actually think it does. I think every single business is looking towards these large hyperscalers to create an AI backdrop for them. They cannot do that on themselves. Every one of these companies constantly are talking on their earnings calls about they have much more demand than there is supply. And that's why they're spending so much. I understand the naysayers because if you're spending hundreds of billions of dollars, if not trillions of dollars right now, and you're not seeing returns for the next two, four, six years, you get skeptical.

21:17in particular the skepticism though is coming from the equity markets we saw stocks skyrocket all-time high valuations expectations that every single one of these companies were going to the moon and beyond the credit markets though have been i think a lot more based in reality spreads have gotten a little bit wider as uh all this debt has come that being said there hasn't been the same sort of panic or sell-off. We're not 35 % or 40 % off from our highs. We're just a little bit wider. And I think that's really the market that you need to look at to see, is there really pessimism? Is there really some sort of systematic problem?

21:57And the reality is, I think the market is much more fighting headlines on return on investment than they are whether or not these are going to ultimately pay off. They are going to pay off. The question just is how much. From a credit side, pretty much everything's trading at par. Things are trading near historic tights. That says our market is pretty comfortable that those cash flows are going to be there in the future. Equities are just a different story. Perhaps they got ahead of themselves, and that's why they're coming back. And that's where we're seeing a little bit of the panic in the market.

22:28But we've been asked whether or not this is a systematic potential risk. And I don't see it at all. And the difference between now and say the dot-com era is the dot-com era had companies that weren't generating any revenues and raising money via IPOs at ridiculous valuations that could never be justified. Here, you actually have companies collecting money. The reason why Amazon stock took off after the end of the quarter was because AWS, its AI and cloud business, had its best quarter in three years off of really large numbers. And you're seeing that across this space. So we've got really big companies generating real revenues and real cash flows today, and they're spending money to make money in the future.

23:12I just don't think that the type of worries that people have out there really are justified. Yeah, it sounds like you think that, you know, yes, they're taking on a lot of debt, but for the most part, it's justified and responsible. Are there certain companies that aren't doing it right, though? I mean, I think of Oracle as an example. You mentioned there. They've taken on more than$100 billion. Investors seem to be getting a lot more anxious. You mentioned their credit rating. I think you said double B or somewhere closer to junk. Are you concerned about a company like that or maybe a company like CoreWeave, again, which is borrowing quite a lot?

23:48Are there companies doing it right and companies doing it wrong? Yeah, it's not necessarily right or wrong. It's just the starting point. So some of the largest companies like Microsoft or Amazon or Alphabet have AA or AAA ratings. So their balance sheets are already prepped for more borrowing. They have little or no leverage. Absolute debt might be high. They might have$50 or$100 billion of debt, but they also have$100 or$150 or$200 billion of EBITDA. So in the world of credit, it's all relative. Leverage is still very low. As you move down the credit scale, somebody like Oracle, who's BBB rated, this is sort of important.

24:25They are investment grade. They're mid-BBB. They've got negative outlooks at S &P and Moody's. People are worried that a name like that could fall to junk because the free cash flow is going to be so negative over the next couple of years. It doesn't mean they're doing anything wrong. And in fact, it appears as if they've got about$300 billion of contracts coming from what we believe is open AI. If that's the case, if they're spending money now, they're more than willing to go into a cash flow deficit in order to meet that demand over the next few years. So it's not a matter of right or wrong.

25:01It's just their balance sheet is starting in a different place. And what that means is that credit risk is going to be higher because they're triple B with 100 billion plus of debt and adding more debt versus a Microsoft's that's triple A that has less debt that's adding debt. So it's still a little bit relative. I don't think it's right or wrong. I think it's all sort of right. They're actually all going after very similar dollars. This is a huge pie of potential revenues. but there's only a handful of players here that are actually building super deep moats around them. They're going to make it so that you're not going to have, there's going to be such large barriers to entry that no one else is going to be able to provide these services.