By Chuck Mikolajczak, Darshan Kumar R and Shashwat Chauhan
NEW YORK, Oct 15 (Reuters) - A market rout centering on the riskiest AI-related borrowers moderated on Thursday, with buyers returning to the tech sector following a weak US open and as a decline in bond yields eased pressure on the sector.
In the spotlight once more was data center operator CoreWeave, which was down 2% at midday after falling as much as 10% earlier on Thursday and tumbling 15% on Wednesday.
The company's bonds traded at yields
as high as 16% and its credit default swap spreads widened, the latest sign of distress centering on rising financing costs. Wednesday's hot US inflation report crystallized risks posed by rising borrowing costs in the capital-intensive AI sector.
Renewed selling focused on large borrowers such as AI infrastructure provider Nebius, off 5%, and big market gainers this year, such as AI server seller Dell Technologies, down 7%, and memory chipmaker Sandisk, down 2%. For the year, Nebius is up 112%, Dell is up 273% and Sandisk is up 476%, LSEG data show.
Some investors said an infrastructure buildout billed as the largest ever was inevitably going to have ups and downs, and more volatility was likely, given increasing interest rates and expectations of further Federal Reserve policy tightening.
“While increased competition within AI, rising financing requirements and higher rates may periodically add to volatility, we view this latest bout as more of a recalibration of expectations than a fundamental break in the AI investment story,” said Ulrike Hoffmann-Burchardi, chief investment officer for the Americas and global head of equities in the UBS Chief Investment Office.
AI SLOWDOWN CONCERNS
Some investors said the concerns about CoreWeave and similarly situated players stemmed in part from the perception that business is slowing at Anthropic and OpenAI, the two large AI labs at the center of the boom.
According to an investor who attended a meeting with Anthropic's leadership in San Francisco on Wednesday, third-quarter revenue rose 45% to $16.8 billion from the previous quarter. Some analysts said that figure was disappointing given expectations for the sector and that Anthropic is targeting a $2 trillion valuation.
"We're getting a whole lot of information suggesting that the largest AI companies may not be generating the earnings or revenue people anticipated, and I think that makes everyone nervous about companies like CoreWeave," said Kim Forrest, chief investment officer at Bokeh Capital Partners.
CoreWeave CEO Mike Intrator said in an internal memo the market is acting “irrationally” and that he remains confident in the AI cloud company, Bloomberg reported on Wednesday.
Investors generally remain sanguine on the sector in part because its largest players, from chip designer Nvidia to the hyperscalers — primarily Alphabet, Microsoft, Meta and Amazon — are highly profitable and widely perceived as well managed, despite concerns about debt.
But higher rates will make borrowing and building costlier, a fact that is likely to hit unprofitable and less-profitable firms first. On Thursday, US interest rates extended their recent declines, with the 10-year Treasury yield briefly flirting with 5% before resuming its ascent, but high inflation has changed investor expectations.
"I do think long rates above 5% and creeping towards 6% is a problem for the marginal borrower, I'll call them," said Ross Mayfield, investment strategy analyst at Baird. "It gets a lot harder for the tiers below the kind of big four hyperscalers."
The Nasdaq was down 0.4% on Thursday afternoon, with Alphabet and the other hyperscalers mostly little changed. SpaceX, another major AI player, was down 3%.
"This select group of companies is driving most of the growth in the economy and the stock market, and they're investing so, so aggressively and investors just aren't really willing to pay for it or fully buy in to the extent that we saw in the late 90s or whatever when investors kind of lost their minds," said Jed Ellerbroek, portfolio manager at Argent Capital Management. "Investors have definitely not lost their minds. They're being very cautious, and I think selective."
(Reporting by Chuck Mikolajczak and Lewis Krauskopf in New York and Darshan Kumar and Shashwat Chauhan in Bengaluru; editing by Colin Barr, Aurora Ellis, Rod Nickel)
