Data Center Growth Doubts Shake Stocks and Bonds
Investor concerns about debt levels associated with the AI build-out are weighing on the shares of several companies in the sector and pushing bond yields related to those infrastructure projects to distressed levels.
CoreWeave Inc. CRWV-Q, a specialized “neocloud” AI compute provider, is one of two anchor tenants for Bell Canada parent BCE Inc.’s BCE-T planned AI data centre in Saskatchewan. The company’s shares have been among the most affected this week, as investors signal unease about extensive AI-related development financed with debt.
CoreWeave’s stock dropped by 15 per cent on the Nasdaq exchange on Wednesday before bouncing back up by nearly 6 per cent on Thursday, buoyed in the afternoon when the chief executive officer of Nvidia Corp. NVDA-Q, Jensen Huang, publicly signalled his support for the company. The chip giant has invested billions of dollars into AI and neocloud companies, including CoreWeave.
The stock closed 15 per cent below where it started the week, as investors instead directed their money to international bond markets.
The company’s bond yields have risen above 15 per cent in recent days, a level investors consider severely distressed. Meanwhile, the cost of CoreWeave’s credit default swaps, a type of insurance on its bonds, has also soared to distressed levels.
Cerebras Systems Inc. CBRS-Q, Bell’s other anchor tenant, saw its shares slump about 13 per cent since the beginning of the week, while two other neoclouds – Nebius Group N.V. NBIS-Q, and Iren Ltd. IREN-Q – each saw their share prices slump around 14 per cent in the same period.
The retreat reflects investors’ deepening concerns about the ability of AI companies to continue raising money to finance the construction of compute infrastructure, and their capacity to pay that debt back down the line.
In a September note to investors, Gartner analyst Will Sommer warned that “multitrillion-dollar writedowns of AI infrastructure assets are more likely than not by 2032″ if capital spending continues at its current trajectory.
He estimated there will not be enough revenue to go around, forcing more than 80 per cent of neocloud providers to cease independent operations by 2030.
“Only once markets consolidate and mature will providers be able to earn sustainable margins,” he wrote.
Investors fleeing AI stocks and bonds for government bonds have caused those yields to decline. On Thursday, the benchmark 10-year U.S. Treasury yield fell more than 10 basis points, even after consumer pricing data and wholesale inflation data released on Wednesday and Thursday, respectively, showed that rising prices remain a concern.
Typically, rising consumer prices push bond yields higher and make it more likely that central banks will increase interest rates in order to curb inflation. Higher interest rates would increase the cost of borrowing for heavily indebted companies.
Construction is currently under way at Bell’s data centre outside Regina, where CoreWeave and Cerebras will be tenants. Bell is investing $1.7-billion in the initial build out, and said in September it plans to quadruple its data centre capacity in the coming years by building other data centres in the area, expanding the project to 1.2 gigawatts of total compute.
Bell’s strategy involves constructing the shell of the data centre and hooking it up to utilities – power and internet connectivity – while leaving its tenants to buy the chips and install their own compute technology.
Bell’s infrastructure-only model limits its direct exposure to processing risks, including technological obsolescence and substantial financing needs. But this model “does not eliminate tenant-credit risk,” warned Scotiabank analyst Maher Yaghi in a note to investors on Wednesday evening.
He noted that AI demand currently continues to outstrip supply, the economics of providing AI services remain attractive and previous sectoral market dips have abated. Meanwhile, “both tenants have signed long-term, noncancellable agreements, and BCE has disclosed advance monthly billing, upfront set-up fees and tenant prepayments,” Mr. Yaghi said.
However, a default by either CoreWeave or Cerebras could interrupt payments to Bell and delay its ability to make a return on its investment, he added. While the analyst did not change his forecasts for Bell, he said “prolonged funding stress, deterioration in credit support or delayed deployment could warrant reassessment.”
In a statement, BCE said it does not disclose details of contractual arrangements for reasons of commercial confidentiality.
“Our Bell AI Fabric facilities are supported by long-term contractual commitments, with protections designed to mitigate potential risk. We continue to see strong demand for AI infrastructure from a range of customers,” Bell spokesperson Adam Austen said in an e-mail.
The company’s share price was up two per cent in Thursday trading on the Toronto Stock Exchange, reflecting investors moving toward equities that are deemed as safer. Telecom companies, which have stable earnings and provide essential services that customers are unlikely to stop paying for, are often seen as attractive assets during times of economic instability.
In September, Bell CEO Mirko Bibic told The Globe and Mail that the demand signals from potential AI customers are “so strong,” and that the company was in advanced discussions with tenants for some of the capacity, although he did not name them. “We won’t have trouble over time filling the 1.2 gigawatts,” he said.
This article was first reported by The Globe and Mail
