I think we can all agree an AI bubble exists, as for when that will be debated until it happens. I think a possibly strong indicator to track is the bps for AI CDS. As there is no official AI CDS, what I have resorted too is the five-year credit default swap spread, or CDS, of major AI-linked companies (MSFT, AMZN, GOOGL, META, ORCL, NVDA, AVGO). If the bps breaks the media of 150 or average of 200 we can see the possibility of the bubble popping soon after if it holds that for at least a couple of weeks.
We can take a look at Oracle and CoreWeave to gain a better understanding of how debt is affecting them and how the risks that they had take on earlier this year and late last year is affecting them.
Oracle has had its investment grade downgraded to BBB- in early July of this year because of its AI infrastructure risk and weak cash flow. Its not impossible to consider that Oracle might be downgraded further as they are only barely above being considered a speculative investment. currently Oracle's bps is around 200, if increases to 300 while its investment rating falls to speculative, that will be evidence that AI credit stress has fully jumped ship from neoclouds, like CoreWeave.
CoreWeave has already hit 855 bps earlier this year, placing it in distressed territory and on March of this year, CoreWeave reported $10B of operating lease liabilities. I expect to see delayed or withdrawn financing, new issued debt yields above 15%, or customers renegotiating contracts.