Data centres fail as AI pick-and-shovel trade

NEXTDC

Today 13:00

    (The author is a Reuters Breakingviews columnist.  The
opinions expressed are his own.)
    By Antony Currie
       MELBOURNE, Oct 23 (Reuters Breakingviews) - So much for
a safe bet on the AI revolution. The smart advice for investing
in potential bubbles is to find the modern equivalent of the
picks and shovels of the US gold rush in the 1800s. For today's
artificial intelligence trade, data centre providers were
supposed to be one of them: no matter whether hyperscalers like
OpenAI and Anthropic or any of the other developers of software
succeed or fail, the demand for places to host the hardware
needed is too strong to shatter. But the stock price crashes at
Australia's NextDC  NXT.AX  and its US neocloud rival CoreWeave
 CRWV.O , and the aborted $5.5 billion IPO of Firmus
Technologies, confirm that investors are realising it's not that
simple.
    Start with the non-financial problems. Data centre
developers want to build as fast as possible to meet their
hyperscaler clients' voracious demand for compute and inference
capacity. Trouble is, that can lead to high expectations, poor
planning and dismal community relations, even for players like
NextDC, whose shares fell 42% on Wednesday, that have been in
operation for decades. Semiconductor shortages continue, for
example. And utilities need more than a few months to get water
and electricity hooked up - one water provider told
Breakingviews conversations ought to start up to three years
before developers buy the land.
    Nscale in the UK lost a contract with Microsoft  MSFT.O 
after being told power would not be available until 2030. NextDC
similarly misread local opposition to its M3 site in Melbourne
right across the street from a residential neighbourhood: the
resulting delays to installing up to 22-metre-high concrete
poles to carry 66,000-volt cables forced CEO Craig Scroggie to
slash its EBITDA forecast by a third, cease projects with no
contracts and consider selling undeveloped sites.
    Such issues can then cascade. Constructing data centres
requires lots of investment. That's mostly done with debt,
usually raised only once a contract has been signed. While that
sounds smart, it leaves the borrower at the mercy of iron-clad
get-out clauses. One is the availability clause: if water or
power connections are delayed by a stipulated timeframe, if a
natural disaster strikes or if chips are either unavailable or
subpar, then the hyperscaler client can walk. There's also a
more general delay clause, which usually stipulates the customer
can cancel the entire contract if completion of the data centre
is more than 12 months late.
    It's bad news for traditional data centre builders and
neoclouds alike. They could be left with the unenviable mix of
part-finished projects, unused land, underwhelming or no
earnings and heaps of debt. Hardly a picks-and-shovels trade.
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    CONTEXT NEWS 
    Shares in NextDC closed down 42% on October 21 after the
Australian data centre builder and operator cut its underlying
EBITDA forecast for the financial year to the end of June by
more than a third.
    The company now expects EBITDA of A$245 million to A$265
million ($172 million to $186 million) for the period. 
    CEO Craig Scroggie also said he is putting on hold all
projects not already backed by customer contracts, has started a
"detailed review" of the company's capital expenditure programme
and is open to selling development sites that "are not required
in the near term".
    The move came after Jemena Electricity Networks informed
NextDC that it has suspended some of the work to increase power
supply to its M3 data centre in Melbourne following "community
and stakeholder opposition". Last month local residents used
their vehicles and other methods to prevent Jemena from
installing concrete electricity poles of up to 22-metres in
height that are needed to carry the 66,000-volt power lines the
data centre will require.
    Scroggie also noted that the company had some A$8.7 billion
of liquidity at the end of September.
    Meanwhile, on October 20, after local opposition Amazon
abandoned plans to build four data centres on a site it had
bought from George Washington University in Virginia in the US.
The company also agreed to donate $5 million to the county's
housing trust fund.

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    (Editing by Una Galani; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can
click on  CURRIE/ mailto:antony.currie@thomsonreuters.com))