In the rapidly evolving landscape of artificial intelligence, a noticeable shift in investor sentiment has emerged in a critical segment of the market. Companies at the forefront of building AI infrastructure, including Broadcom, CoreWeave, and Oracle, have experienced significant stock price declines in recent trading sessions. While these companies remain in positive territory year-to-date, the recent downturn signals growing investor apprehension about the sustainability of the massive investments pouring into AI and whether the projected returns will ultimately justify the expenditure.
“The return on investment absolutely needs to be there to continue funding this AI investment,” remarked Matt Witheiler, head of late-stage growth at Wellington Management, during a recent interview. “From what we’ve observed so far, that ROI is indeed present.” Witheiler elaborated on the optimistic perspective, stating, “Every single AI company on the planet is asserting that with increased compute power, they can generate greater revenue.”
Despite this underlying demand, the market reacted unfavorably to recent quarterly earnings reports from both chipmaker Broadcom and cloud infrastructure provider Oracle. Even though both companies surpassed revenue expectations and provided forecasts indicating robust AI demand, their stock performances suffered.
Oracle, in particular, has become increasingly reliant on debt markets to finance its extensive data center development. The company recently signaled a substantial increase in its capital expenditure forecast for the current fiscal year, raising it to $50 billion from an earlier projection of $35 billion. This upward revision is directly attributed to securing new contracts with major players like Meta and Nvidia. Furthermore, Oracle is actively expanding its leasing commitments. As of late November, the company had outstanding lease commitments for data centers and cloud capacity totaling $248 billion, spanning 15 to 19 years – a significant 148% increase from the end of August.
Concurrently, Broadcom CEO Hock Tan anticipates that sales of AI chips will double year-over-year in the current quarter, reaching $8.2 billion. This growth is expected to be driven by both custom silicon solutions and networking semiconductors tailored for AI applications. However, as Broadcom invests heavily in the components necessary for producing AI server racks, investors may have to contend with a temporary dip in profit margins. The company’s CFO, Kirsten Spears, indicated on the earnings call that certain AI chip systems will experience “lower gross margins” due to these increased production costs.
The market’s reaction has been swift. Broadcom shares saw a 5.6% decline on Monday, following an 11% drop the previous Friday, leaving them 18% below their all-time high established just last Wednesday. Oracle’s stock fell 2.7% on Monday, marking a 17% decrease over the past three trading days. The company has shed 46% of its value since early September, a period that followed the disclosure of a substantial AI backlog, which had previously propelled its stock to its best daily performance since 1992.
Adding to the scrutiny, venture capitalist Tomasz Tunguz, specializing in enterprise software and AI, recently highlighted Oracle’s aggressive fundraising strategy in a blog post. He noted that Oracle’s debt-to-equity ratio has surged to an alarming 500%, significantly outpacing its cloud computing peers such as Amazon, Microsoft, Meta, and Google, which exhibit ratios ranging from 7% to 23%. Tunguz, founder of Theory Ventures, also pointed to CoreWeave, a cloud computing services provider heavily leveraging Nvidia’s GPUs, as another company with a notably high debt-to-equity ratio, standing at 120%.
CoreWeave’s stock experienced an approximate 8% decline on Monday, following an 11% drop the prior week. The company has seen its market value decrease by over 60% from its peak in June. This period of market recalibration suggests that while the demand for AI infrastructure remains exceptionally strong, investors are now meticulously evaluating the financial underpinnings and long-term profitability projections of the companies at the heart of this technological revolution. The focus is increasingly shifting from the sheer volume of AI demand to the concrete, sustainable financial models that will support its continued expansion.
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