AI Infrastructure Trade Stumbles as Neoclouds Slide, Credit Risk Rises and Solidigm Pulls IPO

The Nasdaq ended the week down 0.7% after falling again on Friday following Thursday’s selloff. Among the largest technology companies, Alphabet was the worst performer, with its shares down 6% ahead of its third-quarter earnings report next week. Microsoft and Amazon, which also report next week, each fell less than 1%. The tech market has not seen a broad, dramatic selloff, but the AI build-out is showing signs of strain.

CoreWeave, Nebius and IREN all fell sharply this week, with each down well over 30% in October, according to the report. CoreWeave, the largest of the group, saw spreads on its credit default swaps widen past 11%, a level generally viewed as distress, as investors paid more for protection against default. Yields on its 2031 and 2032 unsecured notes topped 15%.

“What investors are doing is throwing every baby out with the bathwater and saying anyone who is a neocloud” will be devalued, Roundhill Investments CEO Dave Mazza told CNBC’s “Squawk on the Street” on Thursday.

The pressure extended beyond the U.S. Elice Group, a South Korean cloud provider, fell 30% in its market debut on Tuesday. Australia’s NextDC plunged 39.5% on Wednesday after the data center operator cut its annual earnings forecast.

AI optimism has driven the market for the past two years as demand for new models and services pushed the world’s biggest tech companies to spend on infrastructure at historic rates. Skeptics have become more vocal about whether returns on AI investment will justify the capital expenditures. Gartner analysts predict that 80% of neocloud companies will either cease operations or be absorbed by 2030.

Nvidia CEO Jensen Huang remained bullish. At a company conference in Berlin this week, he said demand for neoclouds is “off the charts.” He told CNBC’s Arjun Kharpal that demand for capital is much greater than the availability of capital and that the gap is “going to get solved.”

Wall Street was not convinced. On Thursday, SK Hynix said it was pulling the IPO for Solidigm, citing market volatility. SK Hynix bought Solidigm, which makes NAND and SSD storage for data centers, from Intel in 2021. The company said an IPO was expected to ease investment burdens and expand capacity for shareholder returns, but the review was discontinued in light of market conditions and share price trends.

Even among mega-caps, which have maintained investment-grade ratings while funding build-outs with debt, markets showed jitters. Meta shares fell 7% on Thursday after the company reported negative free cash flow of more than $2 billion in the third quarter and raised the floor of its full-year capital expenditures to $135 billion from $130 billion. Meta also said it plans to spend about $825 billion over the coming years on leases and contracts, with more than $450 billion of those leases being non-cancellable take-or-pay agreements.

Spreads on Meta’s five-year credit default swaps reached all-time highs of more than 124 basis points. CDS on Nvidia and Oracle also touched records, with spreads at 126 basis points and 343 basis points, respectively, this week. Oracle shares have lost more than one-third of their value this year, and the company faces risks of a credit rating downgrade.

John Williams, who leads the derivatives practice at law firm Milbank LLP, said investors are seeking numerous ways beyond buying CDS to hedge their bets on the AI trade. “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 said. “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, told CNBC’s “Squawk Box Asia” last week that the AI trade is “all kind of tied together.” “Can you drop a bowling ball in one part of the pool and not get any waves downstream to the rest of the Nasdaq?” he said. “I don’t know. I have some concern about that.”

Editor's Summary

The AI infrastructure trade weakened as neocloud shares fell, CoreWeave’s credit default swap spreads widened and SK Hynix canceled Solidigm’s IPO. Meta’s negative free cash flow and record CDS spreads added to investor concerns about the cost and financing of AI build-outs.