The burgeoning AI infrastructure sector is encountering significant turbulence, with “neocloud” companies experiencing steep losses and leading tech firms like Meta, Oracle, and Nvidia seeing unprecedented spikes in credit default swap spreads. This financial anxiety culminated in SK Hynix’s decision to cancel the IPO for its Solidigm unit, signaling growing investor caution over the high capital demands and uncertain returns within the AI build-out.
A tumultuous week has rocked the artificial intelligence infrastructure trade, characterized by a sharp decline in "neocloud" companies, a surge in credit default swap (CDS) spreads, and SK Hynix's decision to abandon the initial public offering (IPO) for its Solidigm unit.
Concerns surrounding the AI investment landscape cast a shadow over the Nasdaq, which dipped 0.7% by week's end. Among the tech giants, Alphabet's shares led the decline, falling 6% ahead of its third-quarter earnings report. Microsoft and Amazon also saw slight drops.
While a widespread tech market sell-off has been averted, the ambitious AI build-out is showing clear signs of strain. Neocloud companies like CoreWeave, Nebius, and IREN experienced sharp declines, each losing over 30% in October. CoreWeave, a prominent player, saw its CDS spreads widen past 11%—a level typically indicative of financial distress—as investors sought protection against potential defaults. Concurrently, yields on the company’s 2031 and 2032 unsecured notes surged above 15%.
Dave Mazza, CEO of Roundhill Investments, observed to CNBC's "Squawk on the Street" that investors are indiscriminately devaluing any company identified as a "neocloud," effectively "throwing every baby out with the bathwater."
The apprehension isn't confined to the U.S. market. South Korean cloud provider Elice Group's shares plummeted 30% on its market debut, while Australia's NextDC saw a 39.5% plunge after the data center operator significantly cut its annual earnings forecast. For the past few years, AI optimism has fueled market growth, driving massive infrastructure spending by the world's largest tech companies. However, a growing chorus of skeptics questions whether the returns on these AI investments will ultimately justify the colossal capital expenditures.
Analysts at Gartner, a research and advisory firm, grimly predict that by 2030, 80% of neocloud companies will either cease operations or be acquired. Despite this, Nvidia CEO Jensen Huang, a leading AI evangelist, remains confident, stating at a Berlin conference that "demand for the neoclouds is off the charts." He acknowledged the capital crunch, adding, "The demand of the capital is much greater than the availability of the capital... That's going to get solved."
Withdrawn IPO Signals Caution
Wall Street's skepticism persists. South Korean memory titan SK Hynix, a major beneficiary of the AI surge, announced the withdrawal of its IPO for its U.S.-based Solidigm unit on Thursday, citing market volatility. SK Hynix had acquired Solidigm, a producer of NAND and SSD storage for data centers, from Intel in 2021.
"While an IPO was expected to ease investment burdens and expand capacity for shareholder returns, the review has been discontinued in light of market conditions and share price trends," SK Hynix explained in a press release.
Despite the broader turmoil, tech's mega-caps have largely maintained their investment-grade ratings, even as they ramp up spending on AI infrastructure, often through debt. Yet, even within this robust group, market jitters are evident.
Meta's stock dropped 7% after reporting over $2 billion in negative free cash flow during the third quarter and raising its full-year capital expenditure forecast to $135 billion. The company also disclosed plans to spend approximately $825 billion on leases and contracts in the coming years, with over $450 billion attributed to non-cancellable take-or-pay agreements. This led to Meta's five-year CDS spreads hitting record highs, exceeding 124 basis points.
Similarly, CDS spreads for Nvidia and Oracle also reached unprecedented levels, hitting 126 and 343 basis points, respectively. Oracle, whose stock has shed over a third of its value this year, now faces potential credit rating downgrades.
John Williams, who leads Milbank LLP's derivatives practice, notes that investors are exploring various risk management tools beyond CDS to hedge their AI trade exposure. "There's so much investment going into it that it's just very appropriate to look for risk management tools, completely regardless of whether you're bullish or bearish," Williams commented. "It would be crazy for people not to be looking for appropriate risk management tools for it."
Brian Stutland, portfolio manager at Equity Armor Investments, previously linked AI's impact to the broader market, questioning, "Can you drop a bowling ball in one part of the pool and not get any waves downstream to the rest of the Nasdaq? I don't know. I have some concern about that."
— CNBC's Katie Tarasov contributed to this report
