Meta and tech giants face stock selloff over high AI costs

The cost of the AI buildout

The tech industry is facing a reality check regarding the massive capital required to sustain the artificial intelligence boom. Meta Platforms, one of the major hyperscalers—companies that build and manage massive data centers—announced it will issue a new class of shares to raise funds for its infrastructure.

This move comes as the company faces a significant increase in its annual spending forecast. Meta raised the low end of its expected spending from $130 billion to $135 billion, while keeping the high end at $145 billion. This scale of spending requires significant participation from investors to keep the projects moving forward.

Wall Street is reacting to these costs with caution because the payoffs from these long-term projects remain uncertain. While the hardware and data centers are being built rapidly, the actual revenue generated from these investments has not yet matched the pace of the spending.

Meta's first cash burn

A major catalyst for the recent selloff was Meta's reported financial health in the third quarter. The company reported negative free cash flow of $2.12 billion, which stands in stark contrast to the positive $10.63 billion it reported a year earlier. This marks the first time in more than a decade that Meta has experienced a cash burn.

Investors are increasingly worried that the current level of spending may be creating a money pit. Because the revenue generated from AI is not yet sufficient to cover the costs, the company must rely on selling stock to stay afloat. This puts downward pressure on share prices because it increases the total number of shares outstanding.

The market reaction was swift, with Meta shares falling 8% in a single day. This represents its largest drop since July and contributed to a broader selloff across the Nasdaq Composite. The sentiment suggests that the period of unchecked spending may be reaching a tipping point for shareholders.

Financing hurdles for smaller firms

While the largest tech giants like Meta, Amazon, and Google are generally expected to secure the financing they need, smaller players face a different reality. Analysts are pointing toward a potential financing bottleneck for smaller AI companies as interest rates remain elevated. High borrowing costs make it difficult for these smaller entities to compete for the resources needed to build AI tools.

For example, the neocloud company CoreWeave saw its unsecured bond yields soar to 15% during a recent selloff. Some analysts believe that firms like CoreWeave may need to raise as much as $20 billion to meet their commitments to customers. This creates a high-pressure environment where smaller companies might struggle to survive the buildout.

The risk of an implosion among smaller players is a growing concern for market observers. If smaller companies cannot find affordable ways to fund their operations, it could create a ripple effect across the entire technology sector. This uncertainty is reflected in the rising costs of credit default swaps for many of the biggest AI players.

Market repricing and growth fears

The selloff in AI-related stocks has triggered a broader market reaction, including a sharp rally in Treasury prices. Some strategists suggest that the market is currently repricing the probability of a US growth scare. This suggests that investors are worried that a pullback in AI spending could negatively impact overall economic growth.

The semiconductor index also took a hit, falling to its largest decline since July. This was fueled in part by a 10% plunge in shares of Lam Research following its recent results. As a bellwether of the AI trade, Nvidia also saw its shares drop 4% during the period of volatility.

The current situation highlights a shift in how the market views the AI trade. Instead of focusing solely on the potential of the technology, investors are now scrutinizing the rising costs of the project. The focus has moved toward who will actually benefit from the massive sums being spent today and how long it will take to see a return.