Tech stocks plummet amid debt concerns related to AI
On October 16, just before the weekend, there was a concerning movement in the U.S. stock market. The tech-heavy Nasdaq Composite Index fell 2.1% in a single day, and was down 4.5% for the week, marking its largest drop since late June. According to Yahoo Finance, software and semiconductor stocks were sold off across the board. Approximately $130 billion in market capitalization was wiped out in software stocks alone on that day.
One of the triggers is the “debt” of a company called CoreWeave, which operates data centers for AI. The company buys large quantities of Nvidia semiconductors and rents out computing power to AI development firms. The problem is that much of its capital expenditure is financed through borrowing. The U.S. financial media outlet The Wealth Advisor reported that the company’s debt reached approximately $52 billion as of the end of June. This is about 3.5 times what it was a year ago. The yield on its corporate bonds also briefly rose to nearly 15%. You can think of high yields as a sign that investors are wary, feeling that if they are going to lend money, they need to demand high interest to make it worth the risk.
Of course, the demand for AI itself has not disappeared. According to an analysis by RIA, an investment advisory firm in Texas, the company has long-term contracts worth approximately $100 billion with companies like Meta and OpenAI. However, while interest payments are incurred immediately, the revenue can only be collected after the data centers are completed. This “time lag” is the true nature of the market’s anxiety.
In the Tokyo market, the stock prices of semiconductor manufacturing equipment makers and companies actively investing in AI are likely to be linked to movements in the U.S. There is a strong possibility that the sell-off will spill over at the start of the week. Many people also hold U.S. stock mutual funds through the new NISA, so it is likely that more people will feel the fluctuations in their asset values firsthand.
On the other hand, analysts at major U.S. bank Bank of America point out that the utilization rate of AI facilities is close to 100%. Furthermore, they expressed the view that pessimism has already been priced into the stock market. What is important is to understand that AI has entered a stage where it is being evaluated based on “profitability” rather than “dreams.” I recommend following the news calmly and not panicking too much over short-term price movements.
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Reference source:
Yahoo Finance “Stock market today: Tech sell-off weighs on stocks to end volatile week”: https://finance.yahoo.com/markets/live/stock-market-today-dow-sp-500-nasdaq-futures-mixed-amid-volatile-week-112939401.html
The Wealth Advisor “CoreWeave Stock Crashes 15%. Its CEO Says The Market Is Being Irrational.”: https://www.thewealthadvisor.com/article/coreweave-stock-crashes-15-its-ceo-says-market-being-irrational
Real Investment Advice “Is CoreWeave At The Mercy Of The Bond Market?”: https://realinvestmentadvice.com/resources/blog/is-coreweave-at-the-mercy-of-the-bond-market/