AI fears are rocking markets. The brave should buy the dips.
This past week, investors questioned some of the core ideas undergirding the artificial-intelligence trade, and the market action got ugly. That could make this a golden opportunity to buy the dip in chips and other AI enablers.
We’re not trying to minimize the concerns. The spectacular rise in interest rates—which saw the 10-year Treasury yield hitting 5.36% earlier this month before cooling off—has led to increasing skepticism about the outlook for debt-reliant companies. CoreWeave, which rents out computing capacity to AI model companies, saw the yields on its bonds rise to above 15% (and its stock plunge by about 25% on the week), which earned that “yikes” from the world’s first trillionaire.
“This isn’t the first time we’ve had a sizable market wobble on the back of AI fears, but as we move to a capex cycle funded out of debt rather than simply free cash flow, we have to increasingly respect the credit price action,” writes Deutsche Bank’s Jim Reid.
In other words: a massive amount of capital will be needed for the AI buildout, and higher rates and wider credit spreads will make it that much more expensive for companies to tap the credit markets.
The AI crowd is also looking to equity markets, with OpenAI and Anthropic both planning to go public. But there, too, we’re seeing problems. It was reported this past week that Anthropic grew revenue by 45% in the third quarter over the second quarter, which is obviously impressive. But that’s down from the triple-digit quarter-over-quarter growth seen in the second quarter, leading to concerns about Anthropic’s valuation.
Just as the market was trying to come to grips with AI financing concerns, “the outlined revenue profile of Anthropic underwhelmed, further dampening any AI momentum,” writes Evercore ISI’s Nicholas Amicucci.
Anthropic and OpenAI support a large share of the AI ecosystem, and they might well make the best AI models. But if other models are nearly as good, then companies and consumers won’t be willing to pay up for Claude and ChatGPT. And then who will pay for the data centers and the chips?
So the semiconductors have had a dreadful run, with the iShares Semiconductor exchange-traded fund falling for nine straight sessions to lose 15%. There’s no need to send its holders a condolence basket, though, given that the ETF remains 60% higher on the year.
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