The euphoria surrounding artificial intelligence (AI) is once again\nstirring debate on Wall Street. This time, the focus is not on\ntechnological sophistication, but on how conglomerates owning tech\ncompanies are capitalising on the surge in their share prices to raise\nfunds and make acquisitions.<\/p>\n
According to the Wall Street Journal, one of the most striking\nexamples comes from Elon Musk. When investors pushed up his company\u2019s\nvaluation due to high expectations for AI, Musk used the expensive\nshares to strengthen his position in the industry.<\/p>\n
\u2018What should you do if investors bid up your stock price on the\nassumption that you will be a winner in artificial intelligence, but\nyour product is unpopular? Elon Musk has an answer: Use your expensive\nstock to buy another AI business,\u2019 wrote James MackIntosh in the Wall\nStreet Journal.<\/p>\n
Through a $60 billion stock transaction to acquire Cursor, a popular\nprogramming assistant driven by the \u2018vibe-coding\u2019 trend, Musk gained a\nstronger foothold in the corporate AI market. The move is seen as a\nquick way to enter a segment his chatbot Grok had failed to\npenetrate.<\/p>\n
However, behind the spectacular transaction, signals are emerging\nthat investors should scrutinise. When share prices soar, companies have\na significant incentive to issue new stock because the cost of funding\nbecomes relatively cheap compared to using debt.<\/p>\n
In theory, companies can finance expansion through debt or equity.\nWhen interest rates are low, debt is an attractive choice. Conversely,\nwhen stock valuations skyrocket, issuing new shares becomes a more\nprofitable option.<\/p>\n
The Wall Street Journal notes that a company\u2019s decision to sell\nshares often reflects management\u2019s view of market valuation. This\nconcept aligns with legendary investor Benjamin Graham\u2019s thinking on\n\u2018Mr.\u00a0Market\u2019. Graham viewed Mr.\u00a0Market as a bipolar figure, offering\ndaily prices to investors\u2014sometimes too high (you should sell) and\nsometimes too low (you should buy). According to Graham, when companies\nchoose to issue shares, they are essentially taking advantage of a price\nthey consider attractive to sell a portion of their ownership to\ninvestors.<\/p>\n
This phenomenon occurred during two of the most speculative periods\nin modern capital market history: the dot-com bubble of the late 1990s\nand the SPAC frenzy following the Covid-19 pandemic. During those\nperiods, companies flocked to conduct initial public offerings, issue\nnew shares, and make acquisitions using stock as currency.<\/p>\n
A similar pattern is now re-emerging. The value of mergers and\nacquisitions in the United States over the last four quarters has even\nsurpassed previous periods. According to LSEG data cited by the Wall\nStreet Journal, nearly half of M&A financing in the current quarter\nhas come from share issuance.<\/p>\n
This condition reflects high investor demand for AI-related stocks.\nAt the same time, the supply of new shares is also increasing as\ncompanies seize the momentum to raise funds.<\/p>\n
The Wall Street Journal suggests that corporate financing decisions\ncan serve as a more honest indicator than some conventional valuation\nratios. Metrics such as price-to-earnings, price-to-book value, and\nprice-to-sales are often influenced by fluctuating growth\nassumptions.<\/p>\n
For example, the forward price-to-earnings ratio for the S&P 500\ncurrently stands slightly below 20 times. This figure is lower than the\npeak of 23 times in 2020 and 2025, and the record 24.5 times during the\ndot-com bubble. However, this decline is largely because analysts expect\ncorporate earnings to grow rapidly in the future.<\/p>\n
The primary concern, according to the Wall Street Journal, is not\njust high valuations but the flood of capital pouring into the AI\nsector. When a surge of fundraising occurs\u2014whether through debt, equity,\nor both\u2014three possibilities arise. First, the AI market may be large\nenough to absorb all the investment and still generate substantial\nprofits. Second, the opportunity may be real, but intense competition\ncould erode margins and destroy economic value.<\/p>\n
The third and most feared scenario is that companies are raising and\nspending vast sums simply because shareholders support them, while the\nclaims about AI are largely exaggerated.<\/p>\n
This worry echoes the dot-com era, when companies raced to spend\ninvestor funds in pursuit of growth without clear business models.\nUltimately, many failed to meet expectations and incinerated shareholder\nvalue.<\/p>\n
\u2018The danger is that it will end up like the dot-com companies. Back\nthen, as now, companies raced to spend as much money as possible as\nquickly as possible, and the \u2019burn rate\u2019 was considered positive\u2014until\nall the shareholders\u2019 money simply vanished,\u2019 MackIntosh said.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/ai-fever-makes-global-tech-tycoons-even-richer-heres-the-evidence-1782215533", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }