BlackRock's Rieder Doesn't See a Bubble in AI Stocks

Watch BlackRock's Rieder Doesn't See a Bubble in AI Stocks - Bloomberg on Dailymotion

Transcript

00:00Are you worried about the AI froth?

00:03So, you know, there's something, by the way, this is a time of year you tend to get momentum,

00:07it gets chased out of the markets, particularly today where you have ambiguity around some trends

00:12that are taking place. So, by the way, I know I don't think it's an AI bubble and I don't think

00:16there's too much froth. And depending on where you go, if you look at some of the big hyperscalers

00:21that trade at 20 to 25, 26 times earnings and they throw off ROE, return on equity of 30,

00:2735, 40 percent. And you look at their free cash flow. I've never seen in my career free cash flow

00:34generation. We can talk about top line revenue growth. When you can have that much free cash

00:39flow generation, it allows you to do your CapEx, which is extraordinary today, build R&D, which is

00:45your future cash flow, and then you can buy back your stock. So what's happening, you have an

00:50unbelievable dynamic. And by the way, we're now about to open the buyback window that you have

00:55this dynamic. You throw off immense amounts of free cash flow. And so there's multiples. They're

01:00not scary. There are parts, I see it in the private market and I see it in some places where

01:04you're seeing businesses that have no cash flow for a number of years. How much would you finance

01:08those? So I do see froth in some areas, but in the traditional big market cap stuff, and I would say

01:15related to that in semis, in healthcare technology, where you're seeing rapid change, but real cash

01:22flow alongside of it. It is the exact dichotomy of what you saw in 2002.

01:27Rick, if I can jump in, why then do you have these large cap giants tapping the bond market to the

01:32degree they are? And not just the broadly syndicate market, but also raising capital off balance sheet

01:39too. If they were so confident and have such robust cash flows, is that not a concerning turn of events

01:44that they're instead building up on debt piles?

01:47So first of all, when you look at any measure, debt to EBITDA, you look at their debt to book cap,

01:55debt to market cap, these companies are under-geared, are under-levered. Their cap structure

01:59is so low in terms of leverage relative, certainly relative to their market cap, but relative to their

02:05book cap. If you are running a big, mature company, you think about what does your normal cap structure

02:10look like? And if you're going to fund near-term cap X over the next couple of years, if you can do it

02:16out the yields curve, which is where you see a lot of that financing take place to say, gosh, I am

02:21throwing off a lot of cash flow, but if I can lock in these rates and if I'm as a shareholder of any of

02:26these companies, I say, why in the world would you fund everything with equity? Why wouldn't we put a

02:32little bit of debt, get a little bit of gear and get your ROE higher? So I just think it's a natural

02:37evolution of, gosh, this is how you run a big company and this is what a normal cap structure

02:42looks like.