Renewed jitters over the data center buildout are battering artificial intelligence stocks, and investors are increasingly anxious about the heavily indebted companies driving the AI infrastructure boom. Futures are down on Thursday as persistent inflation weighs on markets and worries grow about so-called neoclouds.
Wednesday's hot inflation reading showed a 3.7 percent increase in consumer prices, driven largely by higher energy costs. That makes it more likely the Fed will raise rates later this year, with traders overwhelmingly predicting one increase at the central bank's December meeting. Higher rates could weigh heavily on highly leveraged businesses like neoclouds. Core Weave shares plunged 15 percent on Wednesday, while Nebius and Iren each fell more than 10 percent. The selloff spread to other AI-linked names, including Taiwan Semiconductor Manufacturing Company, Nvidia, Oracle, Google and Meta.
The neocloud business model looks increasingly uncertain. These companies lease computing power to AI businesses, which requires large amounts of costly processors, pushing them to borrow heavily at high rates. Core Weave had $104 billion in contracted revenue backlog in the second quarter but also more than $35 billion in debt. Yields on its debt this week topped 15 percent. Gartner analysts predicted that more than 80 percent of neoclouds would "cease independent operations" by 2030.
Expect neoclouds to get more creative about financing. Many are raising money directly from large institutions such as insurance companies. Core Weave is seeking funding from insurers' vast pool of capital, according to co-founder and chief development officer Brannin McBee, who spoke to the Financial Times.
Source: New York Times Business · Summarized by HeadlinesBriefing