Red hot CPI report fuels AI rout

By Chuck Mikolajczak, Darshan Kumar R and Shashwat Chauhan

NEW YORK, Oct 14 (Reuters) - Major AI stocks slumped on Wednesday following the latest hot US inflation report, highlighting investor concern about the risks posed by rising borrowing costs in this capital-intensive sector.

Among the leading decliners were data center operator CoreWeave CRWV.O, which fell 16%, AI infrastructure provider Nebius NBIS.O, off 11%, cloud computing giant Oracle ORCL.N, down 9%, and AI server seller Dell Technologies DELL.N, down 11%. Together the declines erased some $80 billion of market value.

The declines reflect the impact of tightening financial conditions, as well as the outsize gains scored by some of the biggest beneficiaries of the AI boom. Barclays on Wednesday downgraded Dell and two other enterprise hardware stocks, noting that Dell shares have quadrupled this year — part of an AI-fueled investor binge that has resulted in 16 stocks in the S&P 500 technology sector .SPLRCT at least doubling this year, according to Reuters calculations.

Concern over rising borrowing costs also weighed on Wednesday's other big decliners. Selling has been particularly intense in CoreWeave, which has issued $22 billion of bonds and $26 billion of loans, according to LSEG data. A CoreWeave bond that was issued in June yielding 9.625% recently yielded 15%.

"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 Chief Executive Officer 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.

Wednesday's rout is the latest sign of a market struggling to come to grips with the implications of high inflation at a time when AI-fueled corporate borrowing has helped push up global interest rates.

Investors generally remain sanguine on the sector in part because its largest players, from chip maker Nvidia NVDA.O to the so-called hyperscalers — primarily Alphabet GOOGL.O, Microsoft MSFT.O, Meta META.O and Amazon AMZN.O — 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 Wednesday, US interest rates rose following the hot inflation report, pushing the 30-year yield as high as 5.63% before rates pulled back sharply in the afternoon.

"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, in an interview with Reuters. "It gets a lot harder for the tiers below the kind of big four hyperscalers."

The Nasdaq .IXIC was down 2% on Wednesday afternoon, with Alphabet and the other major hyperscalers mostly down between around 2%. SpaceX SPCX.O, another major AI player, was down 3%.

"I guess it's grown to a group of five now. SpaceX has kind of joined the party here to join in with like Meta and Microsoft and Google and Amazon," said Jed Ellerbroek, portfolio manager at Argent Capital Management. "Those five are spending like 75% of the money that's being invested in data centers here in the country. And those five are obviously putting all their profits and then some into these data centers and the returns they're generating from those are really good."

Despite the strong economics of these firms and their investments, Ellerbroek said it's not surprising that investors remain skeptical about the AI buildout, in part because of the busts that have preceded this one, particularly the dot-com meltdown that started in 2000.

"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," Ellerbroek said. "Investors have definitely not lost their minds. They're being very cautious and I think selective."