AI infrastructure firms slump as US rate hike bets rise

Rising US Rate Hike Bets Hit AI Infrastructure Stocks and Debt-Laden Firms

Impact of Interest Rate Hikes on AI and Infrastructure Stocks

Oct 14 (Reuters) - Shares of debt-heavy AI firms tumbled on Wednesday as prospects of higher interest rates intensified concerns over the financing of the industry's massive buildout.

Companies whose shares had rallied earlier this year on AI optimism were some of the worst performers on the main benchmarks.

Key Stock Movements and Market Reactions

Here are the details:

AI Cloud and Data Center Firms

• Shares of neocloud firms Nebius and CoreWeave dropped 15.1% and 9.5%, respectively

• CoreWeave stock set to wipe out about a quarter of its value this month, Nebius set to erase almost 20%

• Data center operators Applied Digital and IREN down 8.8% and 9.9%, respectively

Debt-Laden Hyperscalers and AI Server Makers

• Shares of debt-laden AI hyperscaler Oracle were down 7.2% and most of its dollar bonds had also declined

Investor Sentiment and Analyst Commentary

• "Investors are questioning whether the AI buildout will generate the returns that were expected," said Kim Forrest, chief investment officer at Bokeh Capital Partners

• AI server makers Dell and HPE dropped 10.3% and 6.4%, respectively, as Barclays downgraded the ratings on the stocks to "equal-weight" from "overweight"

• "Valuations have run, commodity costs have helped revenues, and we don't see a meaningful AI inflection yet," Barclays said

Macroeconomic Factors and Debt Market Impact

Rising Borrowing Costs and Federal Reserve Outlook

• Higher rates mean elevated costs for firms borrowing to build data centers and buy AI chips

• The prospect of a second Federal Reserve rate hike as soon as this month rose following hot consumer price data

• 10-year Treasury yields climbed 3.6 bps, two-year yields jumped 7.2 bps

Debt Insurance and Market Risk

• The cost of insuring debt against defaults for some AI companies, including Oracle and CoreWeave, surged to record highs, as per S&P Global Market Intelligence data

(Reporting by Shashwat Chauhan and Darshan Kumar in Bengaluru; Editing by Shinjini Ganguli)