AI Stock Sell-Off Intensifies Amid Data Center Spending Concerns

Tech and AI-related stocks experienced a sharp decline on Friday, heading towards their worst weekly performance since July. This downturn is fueled by growing concerns that the extensive investment in data center infrastructure, often financed by debt, may not yield expected returns.

The Nasdaq Composite and the S&P 500 both saw notable drops on Friday, falling 2.4% and 1.3%, respectively. The S&P 500 is on track for its most significant weekly loss since June.

The VanEck Semiconductor ETF, which tracks major chip manufacturers, decreased by 3.3% and is expected to conclude the week down over 10%.

Individual companies also faced significant setbacks. Shares of SanDisk, AMD, and Micron plunged by 6.7%, 5.9%, and 5.7%, respectively. CoreWeave, a major provider of AI cloud services, experienced a substantial sell-off, with its shares dropping 13.5% on Friday and 25% over the past five days. This business model relies on purchasing and renting out computing power, making it particularly vulnerable if the AI boom falters.

Concerns about the overvaluation of AI stocks and increasing competition from China are contributing to what analysts describe as a "full-blown crisis of confidence." Nic Puckrin, a cross-asset analyst and founder of Coin Bureau, noted that the valuations of companies central to the AI buildout might be unrealistic, impacting chip stocks and leading to questions about valuations like Anthropic's.

"We could still see rebounds in tech stock prices from here on, but the days of indiscriminately profiting from anything AI-related are very likely over," Puckrin stated.

The gap between current spending on compute power and projected long-term earnings for AI companies is widening. Research from Gartner indicates that AI providers are expected to spend $7 trillion on infrastructure through 2030, while generating no more than $3.6 trillion in related revenue during the same period. The report also suggests that over 80% of "neoclouds," such as CoreWeave, may cease operations within the decade.

Despite these concerns, the high demand for AI chips and memory has led to shortages and escalating costs. Anthropic, reportedly seeking a valuation exceeding $2 trillion, saw its third-quarter revenue increase by 45% to $16.8 billion. TSMC, a leading chipmaker, has also reported record profits and revenue growth.

However, increased scrutiny on company valuations has intensified as traders worry about a potential oversupply of AI products in the U.S. if the substantial debt taken on for infrastructure development does not translate into robust revenue.

Short sellers targeting the Philadelphia Semiconductor Index have reportedly generated significant paper gains this week. Those betting against CoreWeave are also on track for substantial gains, with credit-default swaps pricing in a greater than 50% chance of default within five years.

Approximately one-third of capital expenditures in the AI sector is financed by debt, and securing financing is becoming more challenging for major tech firms. Global AI-related debt issuance dropped to $23 billion last month, a significant decrease from $113 billion in June, according to the Financial Times.