AI hype will be hard to puncture

Astera Labs,

21/03/2024 12:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own. Refiles to fix hyperlinks and dateline.)
    By Jonathan Guilford
       NEW YORK, March 20 (Reuters Breakingviews) - Artificial
intelligence is as hungry as the technology’s bullish backers.
Data centers will consume some $200 billion of extra capital
expenditure by 2028 to feed the boom, according to consultancy
Dell’Oro. Equinix  EQIX.O , which juggles reams of information
underpinning machine-learning models, is a logical beneficiary;
executives mentioned AI 33 times on their latest call with
investors. Even with an influential short-seller now attacking
the thesis and regulators targeting some of the broader hype,
it’s a bubble that will be hard to puncture.
    A report from Hindenburg Research released on Wednesday
includes allegations of exaggerated profitability metrics, but
the argument coalesces around one idea: Equinix is “selling an
AI pipe dream.” The real estate investment trust’s market value
had swelled by 30%, to $80 billion, over the past year, keeping
pace with the wider exuberance. Server maker Super Micro
Computer’s  SMCI.O  shares have surged nearly 800%. And AI
darling Astera Labs  ALAB.O  made its market debut with a nearly
50% jump in its stock price after having priced it above the
indicated range.
    The dot-com bust might be causing some déjà vu. Torsten
Slok, chief economist for investment firm Apollo Global
Management  APO.N , notes that companies in the S&P 500 Index
 .SPX  trade at higher multiples of earnings than they did in
March 2000. The U.S. Securities and Exchange Commission is now
issuing fines for “AI washing,” or excessive claims about
machine-learning nous, while the U.S. Department of Justice says
it has “numerous” active investigations into the industry. 
    Like the web, AI really does hold out incredible promise.
The problem is separating wheat from chaff. Hindenburg paints
Equinix as a victim, not beneficiary, of AI. Cloud-computing
giants driving the wave – Microsoft  MSFT.O , Alphabet  GOOGL.O 
 or Amazon.com  AMZN.O  – are building their own data centers,
with such “hyper-scalers” owning a growing share of capacity,
Synergy Research reckons. Meanwhile, Hindenburg and others are
raising red flags about the vast watts of power required for
bit-crunching. Utilities are already struggling to keep up.
    This bad news is also sort of the good news. Buyout shops
such as Blackstone  BX.N  have paid whopping prices to invest on
the back of such shortages. It doesn’t, however, answer the
question of whether Equinix and others will fatten up at the AI
trough or starve at the hands of larger technology conglomerates
when constraints ease. Many pretenders will unduly benefit along
the way. Equinix shares dipped only 4% following Hindenburg’s
allegations. It’s another sign that this particular bubble
probably will deflate slowly rather than pop.
    Follow @JMAGuilford on X
    
    CONTEXT NEWS
    Investment firm Hindenburg Research on March 20 disclosed a
short position in Equinix, alleging in a report that the
data-center real estate investment trust has manipulated its
expense and profitability metrics. 
    Hindenburg further argues that rising power demands related
to artificial intelligence will strain supplies at Equinix
facilities and that large cloud-computing providers, such as
Alphabet or Microsoft, may encroach on its business.
    Equinix said it was reviewing the claims and would respond
“in due course.”

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Graphic: Equinix shares have swung around through plenty of hype
Equinix shares have swung around through plenty of hype    https://reut.rs/3TLxJzw
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 (Editing by Jeffrey Goldfarb and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  GUILFORD/  
Jonathan.Guilford@thomsonreuters.com; Reuters Messaging:
Jonathan.Guilford.thomsonreuters.com@reuters.net))