The Mag 7 and How They Pay for AI
The Mag 7 companies now lean more on debt and stock sales instead of free cash flow. This is a real change worth watching. In the past these firms could pay for everything with free cash flow. Last year the hyperscalers issued about $120 billion to $121 billion in debt, up from a normal level near $30 billion. This year Google is issuing stock ahead of the SpaceX IPO, which brings dilution (existing shares lose value when new ones are sold).
A shift in how a company funds itself is a classic warning sign that something might be wrong. But this case may be different. We are in a fourth industrial revolution, a technology shift with no map yet. Nobody knows how high valuations can go. The message from across the industry is that turning this vision into reality will cost more money than the companies currently have. So the borrowing and stock issuance are probably a good thing. They just look strange because we are not used to seeing them.
Rotation Looks Premature
Money has been rotating out of semiconductors, into financials, and back into the Mag 7. But it is too early to call these moves lasting. Markets sat near highs right before the recent drop. Tech will be the name of the game as the fourth industrial revolution gets monetized, driven by AI, quantum, robotics, and blockchain. Many other sectors will ride along. Energy matters a lot right now, made more important by events in Iran. Industrials are the backbone of all this innovation as it comes to life.
The Mag 7 is heavily discounted. If you believe in it, buy the dip, because over the long term everything here should reach true valuation.
Which Trend Pays Off First
Which of AI, quantum computing, blockchain, and robotics is closest to real earnings and monetization today? AI, without question. We moved from free models to paid ones. The free models are heavily subsidized and priced below what they should cost. It works like bait and switch: get everyone using and learning the technology, then start charging fees. AI is now being monetized and used in daily life, at both the retail level and the industrial level. Microsoft and JP Morgan have both said they will cut jobs because of AI.
Robotics is already in play. The next big wave is quantum computing and how it works together with AI. Blockchain follows, now with stablecoins and new laws, the Genius Act and the Clarity Act.
How to Pick the Winners
Look past the Mag 7 to the supporting companies getting big wins: Micron, SanDisk, and Dell's AI servers. These legacy firms are seeing huge upside because they benefit from the massive capex (spending on equipment and buildings) of the hyperscalers.
That capex is the biggest concern. It will likely run through fiscal year 2028. So the key question for any investor is simple: does this company have a path to profit in 2028 and beyond, apart from the capex spending of the hyperscalers and the Mag 7? Also understand that monetizing new technology is bumpy and volatile. If you can stomach that, you should take on the risk and take part.
Earnings to Watch
Microsoft reports on the 29th. The thing to watch is whether its huge capex is actually improving the fundamental margins of the business, or whether the market is just buying forward guidance and ignoring this quarter's real results.
Nvidia matters too. Jensen Huang's comments will be interesting after Xi Jinping's speech and China's new AI push, described as a moonshot. The real question is whether this is another case like the earlier "deep fake" claim that turned out to be less than advertised, or whether China has truly taken the IP and rebuilt it cheaper while keeping it functional. If China really did that, it would be a big problem. These are the things to watch given what China has done in the last 24 hours.
