Tech stock sell-off reopens debate on who will foot the AI bill

The recent stock sell-off in the tech sector has reignited the debate over who will bear the cost of artificial intelligence (AI) development. Wall Street is now asking who will finance the industry's multimillion-dollar investments and increasingly expensive financing plans. One symbol of the sector's uncertainty is CoreWeave, a U.S. cloud computing firm specializing in AI and partly owned by Nvidia.

The firm's share value has plummeted by 36% in the past month, with investor demand for returns soaring to 16%, a level often associated with companies facing solvency concerns. CoreWeave's financial situation is further complicated by its $50 billion in debt and plans to continue seeking funding for expansion. The company's struggles have sparked broader concerns about AI infrastructure firms' ability to sustain growth.

While semiconductor manufacturers have seen a 19% decline in value over the past 12 trading days and are on track for their worst performance since 2008, some AI-related companies are scaling back their IPO plans due to declining investor sentiment. High-profile AI-focused firms like Elice in South Korea have already faced significant share declines following their initial public offerings.

The industry's shift from hyperscalers like Amazon, Microsoft, and Alphabet to neoclouds, which specialize in purchasing processors, installing them in data centers, and selling capacity to the market, has also brought new financial challenges. CoreWeave exemplifies the vulnerabilities of these new actors, with its net losses of $626 million in the second quarter, primarily due to $640 million in interest payments on its debt.

Despite recent tech corrections that have historically triggered concerns about a potential bubble, investors have maintained their faith in AI. However, the current downturn is taking place in a different context, with central banks maintaining restrictive monetary policy, high debt yields, and increasing expectations about debt issuance.

The focus has now shifted to the ability of AI-infrastructure companies to finance their growth. While some analysts believe the financing issues are specific to a small group of highly leveraged neoclouds, others argue that the sector's overall fundamentals remain solid. The debate now centers on how much it will cost to keep the AI industry moving forward.