(MENAFN- ING) Capital expenditures by data centres

As has been well documented, the large US technology companies are accelerating their data centre investments on the back of strong expected demand for new, AI-based services. Expected growth for these new services compounds already strong growth for the Cloud services segment. As can be seen below, investments by the largest technology companies are expected to surpass the US$400bn mark in 2026.

US big tech on an investment spree (US$bn)

Source: Refinitiv, ING These investments are enabled by strong cash generation

The investments described above are mind-blowing, given their scale. What is even more striking is that these investments have been funded from operating cash flows. In contrast, Europe lacks large, listed peers to Microsoft, Alphabet, or Amazon, making such self-funded investment less feasible.

As there is no such software company generating billions of free cash flow, there is also not a natural investor investing in the next growth phase of the cloud data centre business. This is a pity, because Europe is also not home to the biggest venture capital firms and listed asset managers.

US technology platforms fund their expenditures from their cash flows

Source: Refinitiv, ING Could accelerating data centre investments pose risks to credit markets?

There are many uncertainties with respect to the required investments as well as the revenue opportunities coming from AI services. From a debtholder perspective, we are less concerned with a potential mismatch between supply and demand, as the large technology platforms mentioned above have funded their expansion plans from their cash flows.

Besides these large technology platforms, there are also pure-play data centres that have issued euro-denominated debt. The business model of these data centres benefits from a critical hub function. That is not to say that every AI and data centre start-up will be successful. However, as venture capital-backed companies typically do not issue investment-grade debt, we see limited risks for our market.

On the contrary, we think data centre investments in Europe are lagging global developments.

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