Technology companies making large investments to gain an edge in the AI infrastructure race are now forced to follow the Federal Reserve's interest rate decisions more closely. Mega tech firms, long insulated from rising rates due to strong balance sheets, are now depleting cash reserves and resorting to borrowing to finance ambitious data center investments.
Cost of Borrowing Gains Importance
Peter Boockvar, Investment Director at One Point BFG Wealth Partners, noted that tech investors are not accustomed to watching interest rates, stating, "Tech investors now need to listen to what Kevin Warsh says, start paying attention to inflation statistics and how the US Treasury market reacts to them."
Federal Reserve Chairman Kevin Warsh held his first press conference on Wednesday. The central bank pointed to the possibility of a rate hike in 2026, a statement that triggered a sell-off in stocks and a rise in interest rates. The 10-year Treasury yield is trading around 4.45%.
AI Investment Spending at Record Levels
The impact of rising interest rates is now spreading to larger companies. The reason is that tech giants are in a high-speed race to expand AI infrastructure. Amazon, Alphabet, Microsoft, and Meta are expected to invest a combined $750 billion this year, representing an increase of more than 80% compared to 2025.
A large portion of this expansion is being financed by debt, and borrowing becomes more difficult when interest rates rise. Nvidia, Oracle, Amazon, Alphabet, and Meta are each turning to debt markets for tens of billions of dollars.
Jeff Kilburg, CEO of KKM Financial, noted there is an "insatiable demand" for AI-related funding, saying, "Technology leadership is embracing debt. It's a perfect recipe for these AI people who are sure what they want to borrow and spend."
Cash Reserves Are Depleting
Tech giants need money because some are depleting the cash reserves they have built up over years. Goldman Sachs highlighted that the ratio of capital expenditures to cash flow is at its highest level since the dot-com era. The firm also stated that capital expenditures this year will be close to $920 billion and that analyst estimates have remained "very conservative" over the past three years.
Amazon, which is projected to spend around $200 billion this year, is widely expected to see negative free cash flow.
Peter Boockvar said, "Tech investors are learning what it's like to be an investor investing in capital-intensive old economy industrial businesses. Free cash flow is showing volatility, and access to both debt and equity markets to finance all of this is crucial."
Jay Woods, Chief Market Strategist at Freedom Capital Markets, assesses debt risk on a company-by-company basis rather than for the entire sector. For example, Nvidia has a strong cash position, with free cash flow in the last quarter jumping to over $48.5 billion from $26.1 billion the previous year.
Regarding Nvidia, Woods stated, "They still have a deep cash reserve, so I don't think this is a huge red flag. It gives them flexibility."
