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Smart to borrow when money is cheap if you think you can do something more profitable with it.
by xnx 4mo ago
Smart to borrow when money is cheap if you think you can do something more profitable with it.
- mathattack 4mo agoIf you’re profitable and can pay it back, it’s better than equity. If there’s any financial risk then it may not be worth the potential loss of control.
- adam_arthur 4mo agoWould depend on the yield on debt vs yield on equity (factoring in earnings growth rate) If your company trades at 100x sales you should probably sell the equity.
- mathattack 4mo agoIt’s not just yield. Its debt gets paid first. And if you miss the interest payments the debt holders get the company.
- spwa4 4mo agoIf you mean that taking out any kind of debt is fundamentally a bet that whatever is being put up as collateral will grow faster than the interest rate? Because if it doesn't the risk that suddenly debt holders control you grows by a lot. Yes, absolutely. So, applied to GOOG, Alphabet Management is betting they will grow more than 4.5% per year at least until 2030. There is also some weirdness, like Alphabet making a 500 million USD bet short term USD interest rates will be lower than 4% over the 2025-2028 period.
- mathattack 4mo agoSort of. They can use the debt to grow, in which case they’re betting that they will get more profit than the principal plus interest payments. (Beating a 4% return on the loan, not the whole company) They could also use it to change the capital structure buying back shares. This simultaneously increases risk and share price, unless the reissue more shares. In both cases, if they can’t pay the interest payments, the company gets handed over to the creditors. Not an issue for Google, but a lot of startups struggle with venture debt.
- altmanaltman 4mo agoBut money has not been cheap for a while now so this is interesting. And yes, if you can do something more profitable with it, borrowing is always smart no, regardless of how cheap it is?
- Den_VR 4mo agoIt’s a matter of perspective. Cheaper to borrow today than in the years 1969-2005…
- altmanaltman 4mo agoLiterally doesnt matter. The baseline for tech is the zirp era of 2010s. Over time borrowing costs and rates have gone up. The ecosystem was very different pre zirp era and comparing is kind of pointless.
- kevin_thibedeau 4mo agoThe current tech frontier requires capital expenditures on a scale they've been systematically avoiding for 25 years because pure software was easy money. The interesting thing is how they're all trading paper amongst themselves with made up valuations and what blows up when the music stops.
- warumdarum 4mo agoPut ot all on a heap on eletrically charged sand and light it on fire?
- stephen_cagle 4mo agoAlso, if you have expectations that future inflation may be high, the leverage of borrowing can make sense as a hedge against your cash equivalent holdings in that scenario.
- idiotsecant 4mo agoHow do these AI companies turn profitable on a short enough timescale for that to make sense? Suppose a step change AI model comes out tomorrow with good enough reasoning to basically replace an employee. Businesses need to retool workflows and processes to accommodate, even if it's better. This is years away, not months. There's not enough market for the compute. And that all assumes science fiction level results, which there is absolutely no indication they will achieve.