Markets Whale

Many bears warn that hyperscalers’ capital expenditures (CAPEX) on AI are reaching dangerous levels, drawing parallels to the dot-com bubble when excessive spending led to massive collapses. The flash crash linked to the Deepseek saga earlier this year is often cited as a cautionary example. However, a deeper analysis reveals the current CAPEX scenario is less alarming than suggested.

While hyperscalers are indeed increasing CAPEX to secure first-mover advantage in the AI revolution, their spending remains below 25% of sales. This contrasts starkly with the dot-com bubble peak, where CAPEX surpassed 40% of sales—a far more precarious level. Importantly, the current market leaders generate strong free cash flow, enabling them to fund their investments through actual revenues rather than heavy borrowing. Debt-to-EBITDA ratios today sit below 25%, dramatically lower than the 192% observed during the dot-com era. This indicates much healthier balance sheets and less financial leverage.

Turning to Oracle (ORCL), the company recently reported nearly $100 million in losses from renting Nvidia chips, with gross profit margins on server rentals averaging around 16% over the past year. This illustrates the upfront costs and margin pressures faced by companies aggressively scaling their AI infrastructure. Oracle, like others such as NBIS, IREN, CIFR, and CRWV, is investing heavily in rack-level hardware to meet anticipated demand growth—which, while pressuring near-term margins, positions them for future revenue acceleration.

The recent market reaction to Oracle’s report—shares down around 6% intra-day compared to a smaller decline in QQQ—reflects concerns around AI margin weakness. However, as Fox Business noted, the negative take appears exaggerated given the long-term growth outlook and typical scaling dynamics in this emerging sector.

In summary, the hyperscalers’ CAPEX binge should be viewed in context: substantial but manageable, funded by strong free cash flow, supported by robust balance sheets, and reflective of strategic positioning rather than reckless spending.

Disclaimer: This information is for educational and informational purposes only. It does not constitute financial advice, nor does it constitute a solicitation to buy or sell any securities. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.