Broadcom CEO Hock Tan.
Lucas Jackson | Reuters
In at least one corner of the artificial intelligence market, sentiment has turned decidedly negative.
Broadcom, CoreWeave and Oracle, three companies intimately tied to the AI infrastructure buildout, all had another rough day on Wall Street on Monday after selling off sharply last week.
While the three stocks are all still solidly up for the year — CoreWeave held its market debut in March — the most recent trend suggests that investors are concerned about whether the returns on investment will ever justify the level of spending taking place.
“It definitely requires the ROI to be there to keep funding this AI investment,” Matt Witheiler, head of late-stage growth at Wellington Management, told CNBC’s “Money Movers” on Monday. “From what we’ve seen so far that ROI is there.”
Witheiler said the bullish side of the story is that, “every single AI company on the planet is saying if you give me more compute I can make more revenue.”
Still, the market was displeased last week with quarterly earnings reports from chipmaker Broadcom and cloud infrastructure supplier Oracle, even though both companies beat on revenue and issued forecasts showing that AI demand is soaring.
Oracle, which is now heavily reliant on the debt markets to fund its data center development, provided scant details about how it will continue to finance its commitments. The company said it would ramp up capital expenditures in the current fiscal year to $50 billion from an earlier forecast of $35 billion because of new contracts from the likes of Meta and Nvidia.
It’s also ratcheting up leases. As of Nov. 30, Oracle had $248 billion in lease commitments for data centers and cloud capacity commitments that will run for 15 to 19 years. That’s up 148% from the end of August.
Meanwhile, Broadcom CEO Hock Tan said he expects sales this quarter to double from a year earlier to $8.2 billion, driven by both custom AI chips as well as semiconductors for AI networking.
However, as the company spends heavily on more parts to produce server racks, investors are going to have to stomach a hit to profits. CFO Kirsten Spears said on Broadcom’s earnings call that “gross margins will be lower” for some of the company’s AI chip systems.
Broadcom shares fell about 5% on Monday following an 11% slump on Friday, leaving them 17% below their record high reached on Wednesday.
Oracle dropped about 2.5% on Monday and is now down 17% in the past three trading days. The company has lost 46% of its value since Sept. 10, when the stock had its best day since 1992 following disclosure of a massive AI backlog.
Venture capitalist Tomasz Tunguz, who focuses on enterprise software and AI, wrote in a Monday blog that Oracle’s recent fundraising binge has left it with a debt-to-equity ratio of 500%, “dwarfing its cloud computing peers.” Amazon, Microsoft, Meta and Google all have ratios between 7% and 23%, he wrote.
Tunguz, founder of Theory Ventures, said the other company with a notably high ratio, at 120%, is CoreWeave, which provides cloud computing services built largely around Nvidia’s graphics processing units.
CoreWeave shares fell about 6% on Monday after dropping 11% last week. The company has lost 60% of its value from its high in June.
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