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The July scare
In July, worry that Kimi would undercut the frontier labs' revenue hit the sector. If the frontier labs earn less, fewer of them can pay for all that compute. CoreWeave and the other AI infrastructure names, along with semiconductor stocks, traded down about 40%.
Leverage ties it together
Leverage ties the sector together. Backstops and seller financing let companies build ahead of their revenue, and some call the result circular revenue. Credit spreads on these deals have stayed wide. When demand wobbles, everything trades down together, and the move turns violent.
Demand exists today
Demand exists in the world today, with Anthropic growing 10 times year over year and OpenAI at maybe 4 times or higher.
Why do related stocks fall together?
When one shared fear drives prices, investors sell the whole group instead of judging each company. Sellers also treat companies in the same sector as having the same customers and the same funding sources. Funds that hold the whole group must sell all of it when money is pulled out. The dot-com bust is the standard example: the Nasdaq Composite fell about 78 percent from its March 2000 peak to October 2002.
How does seller financing create circular revenue?
When a supplier lends money to a customer, or invests in it, and the customer uses that money to buy the supplier's products, the supplier's sales depend on its own financing. Accountants and analysts look at such deals closely because the revenue may not reflect independent demand. In the late 1990s, telecom equipment makers lent heavily to their customers in this way. When many of those customers failed in 2001 and 2002, the lenders took large losses on the loans.
Why do wide credit spreads strain builders?
A credit spread is the extra interest a borrower pays over a US Treasury of the same length. It widens when lenders see more risk of non-payment, which raises the cost of every new project funded with debt. During the 2008 financial crisis, the ICE BofA US High Yield index spread peaked at more than 20 percentage points.