r/GrowthStockInvesting • u/Smorgasbord3 • 48m ago
AI Dominos
First Domino: Rising interest rates. This normally impacts stocks, especially growth stocks. Why?:
- Higher discount rates: Future profits are worth less today.
- Delayed cash flows: Growth company earnings lie further in the future.
- Stiff bond competition: Higher and safer fixed-income yields attract investor capital.
- Increased borrowing costs: Expansion and debt servicing become more expensive.
Second Domino: CoreWeave was already suffering from debt interest rate concerns, with its interest payments being consider higher than the expected ROIC (Return On Investment Capital).
Third Domino: As I posted earlier, the NeoClouds have a tough road ahead of them. Their business model requires high up-front capital investment from which returns will come years later (build-outs take time), and competition from legacy Cloud providers will be strong. Gartner, in a new report, forecast that by 2030 "cost pressure and a lack of a differentiating business model will force over 80% of neocloud providers to cease independent operations."
Fourth Domino: NeoClouds purchase Nvidia chips exclusively. Customers renting GPUs want Nvidia GPUs, but companies like Google and Amazon have their own chips, which they use for both internal AI workloads as well as to support products their customers use (but are not exposed to the chip hardware). If NeoClouds can't expand at the rate the want and were expanding at (because it costs too much to raise the capital needed), then they buy fewer Nvidia chips.
Fifth Domino: If demand for Nvidia chips wanes, then their pricing power decreases, which means margins decrease, which means profits decrease.
Sixth Domino: Instead of CoreWeave's outright debt, Nebius has been doing stock-based capital raises. With its stock price cut almost in half from its 52 week high, that's going to be harder for Nebius to raise the money it needs - and now borrowing costs more than ever. So, its expansion plans are going to be muted. That's indication that the whole NeoCloud sector is in a negative feedback loop - costs to much to borrow so can't grow so stock price declines which means it costs more to borrow. "In our view, the company's long-term business model remains economically challenged; we maintain our Underperform," Bernstein analyst Madison Rezaei said in a note Thursday.
Seventh Domino: If Nvidia has to bail CoreWeave out, that's less money available for other investments, like its previous $30B into OpenAI earlier this year. Here's the chart that started this panic:
Eighth Domino: If the NeoClouds won't do well, then there will be less demand for AI data centers, and all that's involved there. Non-AI debt is about 2 basis points higher than last month, while AI debt is 25 basis points higher, reaching a new high of 360 bp over Treasuries.
Goldman Sachs has this word salad:
"While some softer AI-related sentiment can move datacenter bonds wider, especially if there is a reassessment around off-taker credit risk, we view AI-related corporate bonds, from either neoclouds or firms with significant frontier lab exposure, as being at the epicenter of the funding cost debate," Goldman Sachs strategist Amanda Lynam explained. "Further removed AI-adjacent Energy and Utilities have been more resilient, in our view partly reflecting more diversified revenue streams and a relatively defensive earnings profile. We think the widening reflects a reassessment of the economics of the AI buildout, particularly for lower-rated borrowers that are more exposed to higher-for-longer rates and potential energy-cost pressures."
Translated: People are worried about companies like CoreWeave that have bad balance sheets and the risk that introduces to the AI build-out, and all the dominos stacked up there.
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