That question was on the minds of millions of investors Thursday, as the Nasdaq Composite (NASDAQINDEX:^IXIC) had one of its worst days ever, plunging 5.5% as fears spread that a political backlash could stifle the AI boom, following the midterm elections.
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Investors believe election winners in Texas and elsewhere will impose significant restrictions, or even an outright ban, on data centers, which became a lightning rod during the campaign. After being among the few losers on Wednesday, chip stocks collapsed on Thursday, with the VanEck Semiconductor ETF losing 11.2%. Same industry leader Nvidia lost 9.1% and the crash triggered a broader sell-off in the stock market, with all 11 sectors falling, even the most defensive ones like utilities and consumer staples.
Image source: Getty Images.
What’s happening in the data center industry
AI infrastructure stocks started to wobble a few weeks ago, starting with a chart showing that neocloud operator by CoreWeave (NASDAQ: CRWV) bond yields soared as high as 15%, and concerns about a potential default sent shares tumbling.
Results from large hyperscalers have been similarly received, with investors concerned about skyrocketing capital expenditures and negative free cash flow, even as these companies continue to grow rapidly and are extremely profitable.
Then the election happened and fears of a slowdown in data center construction led investors to flee AI stocks.
Stock market reactions to elections are notoriously ill-considered and often short-lived. Stocks fell following the Brexit decision before rebounding in the following days, and stocks plunged overnight when President Trump was first elected before turning green the next day.
This sounds like a similar reaction. Technology stocks first fell Tuesday evening before the Nasdaq jumped on Wednesday. The response is understandable as data centers were a major talking point during the campaign, but the sell-off appears to be an overreaction.
Gina Hinojosa, the governor-elect of Texas, campaigned for a temporary moratorium on data centers and reasonable guidelines, such as banning subsidies for data centers. However, she is not radical and told CNN: “We will have laws to protect Texans, and we need to stop what we are doing with data centers until we have those protections.”
In a worst-case scenario, with a significant slowdown in data center construction in the United States, most industry observers believe that activity would simply move overseas, meaning that industry growth would not be significantly affected.
In an interview with the Motley Fool, Arm holds (NASDAQ:ARM)CFO Jason Child explained his thinking on the matter this way: “Let’s just say everything (data centers) is slowing down. Do we believe the demand for AI will slow? I think in general, most people say no. The genie is out of the bottle. » Child also said he was generally skeptical of any policy response and said bipartisan interest in economic growth was too strong for there to be a significant slowdown in construction. He also noted that Arm could still benefit from a slowdown in data center construction because its chips excel in performance per watt, which would be in higher demand if data center construction was artificially limited.
What this means for investors
It’s not easy to predict where the data center debate will go, but Child is right that demand for AI is strong and unlikely to be dented by a slowdown in capacity growth.
Meanwhile, many of AI’s top stocks look cheaper than ever. Nvidia (NASDAQ:NVDA) now trades at a forward P/E below 20 and is nearly doubling its revenue each quarter. Micron (NASDAQ:MU), the leader in memory chips, trades at a forward P/E of less than 4.
Many of these AI stocks have already soared this year, so the pullback should be viewed in that context, but like “Liberation Day” and other political issues that have roiled markets, this response likely seems like an overreaction and will pose no problems over the next year. Buying the dip on quality stocks like Nvidia seems like a smart move.
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Jeremy Bowman holds positions in Arm Holdings, CoreWeave, Micron Technology and Nvidia. The Motley Fool holds positions and recommends Arm Holdings, Micron Technology and Nvidia. The Motley Fool has a disclosure policy.
The Nasdaq plunges 5%. What the Data Center Crash Means for Investors was originally published by The Motley Fool
