WSS: Debate on sector’s trajectory continues; earnings, more expansion projects suggest bearish claims grounded in short-term views
The sector continues to see a tremendous volume of activity amid earnings season and continued debate about the demand and supply situation facing the market. Last week, we looked at the question of whether Microsoft is possibly headed into an oversupply situation as it has been reported to be pulling back on some leases and infrastructure commitments. We found the argument relatively unconvincing as there are plenty of explainable scenarios for why Microsoft could have pulled back. One of them is the apparent shift in infrastructure strategies at OpenAI. It is still working with Microsoft for infrastructure, but reports are out there that it could be looking to move up to 75% of its infrastructure to the Stargate Project. To be sure, this project is in its early stages, but the data centre being built in Abilene, Texas by Crusoe for Oracle Cloud and OpenAI is a template for how this may play out. This alone may be a big part of why Microsoft is pulling back. Some of Microsoft’s plans may well have been tied to this shift and just reflects the normal course of tweaking and changing plans when it comes to something as big as planning hyperscale infrastructure.
The debate about the sector’s trajectory continues, but investments and forward planning continue regardless. There was reporting this past week that Meta is looking to raise up to $35b of capital to support a data centre build in the multi-gigawatt range as it doubles down on AI investments. The scale and scope, needless to say, is unprecedented and the prevailing sentiment among hyperscalers is to invest and risk over-investing rather than being caught under-investing. These are yet more signs that demand is there and the planning horizons are lengthening.
Earnings season provides data points that speak to the sector’s trajectory. We have seen Digital Realty and Equinix report, and this past week we looked at Iron Mountain’s results, which showed leasing momentum and healthy revenue growth. Meanwhile, we took a closer look at the managed infrastructure and webscale tier of cloud providers, with results coming from DigitalOcean, Akamai and Rackspace. DigitalOcean and Akamai are performing well and Akamai showed signs that it is reaching an inflection point and really tapping into the upside in its model, while Rackspace has picked up some momentum in leasing, but is still going through growing pains with its transition. It is still experiencing heavy revenue attrition.
Amid unprecedented growth, investors are trying to tap into the Internet infrastructure value chain through the public markets and some have gone a bit far, betting on nuclear companies as a response to data centre and AI demand amid a constrained energy environment. While some commentators feel like Apple or Tesla are ways to play for the growth in the market, they are also not great indicators, but NVIDIA is. Its main product – GPUs – all live in data centres of some sort and growth and demand in this world is a good proxy for the sector. We take a closer look at NVIDIA’s results in this past week and all signs are that things are pushing forward. On a side note, If you want to see some commentary that is symptomatic of the overreaction to recent developments and misunderstands how the market works, where the value is being driven and how anything but a long-term view misses the point, you can see some comments from Jim Cramer of Mad Money, (starting at 2:42) who just a while ago was touting how data centres was a can’t miss sector (starting at :35). Things apparently changed quite quickly (DeepSeek anyone?) and Cramer seems to think that Apple has traded better lately because it has not spent too much CapEx on data centres? Not sure how that is relevant really or how he ties those things together.
Despite all the chatter and collective freaking out in certain pockets, the infrastructure landscape continues to grow and expand. It is a decidedly long-term business after all and something that many misunderstand. One of the big long-term growth areas is going to be GPU cloud infrastructure, whether on hyperscalers or GPU-oriented clouds. The poster boy for the latter group is CoreWeave and it filed its S-1, showing tremendous revenue growth, with a relatively high customer concentration level. Meanwhile, another GPU cloud infrastructure provider – Together AI – just raised a significant Series B round at a valuation of over $3b.
The energy sector, as mentioned above, could be one way to play the data centre value chain, but nuclear is still a ways off. Alternative energy sources have been explored for some time and are supplementing grid sources on-site. Bloom Energy and Equinix have been working together for some time on this and Equinix is set to deploy up to 100MW of Bloom’s full cells across multiple data centres in the US. Energy consumption continues to put pressure on utilities and in the past week, we took a closer look at what is happening in Indiana, which has some parallels to recent developments in Ohio. Utilities are making tweaks to how they do business with large-load customers, requiring commitments and payments so that transmission infrastructure is built and increased production expenses are not passed down to customers because of rampant hyperscale demand. It is a sign of the times, but the requests in the pipeline, even if they have overshot by some, point to a healthy pipeline of demand that will translate into value for the sector.
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