Context: investment professional currently working in a pension plan. 15+ years working exp, in equity trading, credit research, RE and Alts.
How do institutional managers work: as far you rise in the corporate ladder, managers have more macro views and less company specific views. I hear senior managers extremely worried about inflation, treasury yields and consumer spending. They spend 0 time around going through earnings calls of specific companies.
Current feeling at Investment Committee level: you often hear them repeat cliche phrases such as "AI is real" and "this is a multiyear cycle", but they have little data to no data or insights into why this is or the economics of building and leasing a data center. They really bought into the AI anywhere between late 25' or 26', and never really 100% convinced.
My current read on whats happening: Mid july (I think that was the timming when the HF blowed up) everyone freaked out. True, the war resumed and inflation started to permiate. All of a sudden rate hikes were the market consensus. Also, the long end started to rise as well, more to do with issuance (gov and private) as well as higher growth perspectives. IC takes all this inputs and ask each team to "reduce risk". Well guess were most "risk" is....
Views for the AI trade: fundamentals continue to improve, we are obviously 2-3 years into the capex cycle. There is a huge disconnect from price action to all leading indicators (for me most importante probably compute price and ASML guidance as they are the fist step in the suppy chain). I will bet my house the hyperscalers are minumum 2-3 years out from slowing their investments. Dont forget this companies can invest probably $150bn from FCF alone, plus all are pretty lean in terms of leverage. Also, from their standpoint if they are left behind they will become the Yahoo/Netscape of the AI era.
The best case: The war eases, oil comes down, inflation expectations come down and the market erases all rate hikes expected for the next 12 months. Market rallies fast and furious.
The "reallistic" worst case: The war drags allong for a year or who knows... eventually oil at 100 becomes our status quo. AI names continue to grow quarter after quarter, no slowdown on the capex cycle. Eventually market catches up and market rallies in a more slow and steady manner. Before you say, "but higher rates might make the buildout undoable" I will tell you this: data center yields are at 10-12% currently, you put debt at 8% and its still a great return for the equity. First of all, are you a fucking bear?
Second, and more seriously... Sure, Coreweave or more levered players might struggle to raise debt, maybe they slow down, but there are ton on players who will not have a hiccup in this scenario. Also, don't forget that is the more infra layer of the stack. Chips, memory, energy and other related player have absolutely no issue with higher yields. Many of them are swimming in cash and are have no debt. Also, margins of 80%.
My only true worry is a paradigm shift at the model level that suddenly makes all current compute enough for the demand. But to this point, the AI labs are the most interested to achieve something like this and at the same time, the ones that have the best insight into this, and they keep on commiting to new compute capacity contracts.
