Australia's Nextdc Stock Collapse Fires A Global AI Warning

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These jitters reflect the harsh reality of AI: while the hype is strong, the business models are coming under increasing scrutiny.

Rising costs for massive investments

Hundreds of billions of dollars have been spent globally on training models and building the data centers to house the infrastructure that powers AI. The pipeline of investments is expected to reach some US$10 trillion (A$14.25 trillion) by 2032.

Until recently, much of the capital expenditure was funded internally by the AI companies or by raising money directly from investors; more recently, they have been borrowing vast sums in the corporate bond market.

And while those investing in AI are patient, they still expect to see significant financial returns.

Sticky inflation and rising interest rates complicate this further. Data center developers now face higher borrowing costs, plus higher construction costs. And rising interest rates can make other investments more attractive.

Analysts estimate that giants like OpenAI and Anthropic will need to increase revenues by 80% a year for the next six years to meet investors' revenue expectations. Yet, indicators suggest that consumer and corporate spending on paid AI models is slowing down.

Racing for chips

To make things worse, the hardware that AI depends upon is driving real investor concern. Historically, data centers could operate for decades with minimal maintenance, guaranteeing rents and returns.

But AI chips have a shelf life of only a few years. Each new generation requires upgrades to power delivery and cooling, trapping data centres on a treadmill of multibillion-dollar expenses to pay for these upgrades.

Even if AI revenues stabilize enough to support these expenses, there's no guarantee that data center companies will be able to access the chips they need to fill data centers and support AI demand.

Amazon recently admitted it is hoarding billions of AI chips, even though it doesn't have any capacity for installing them. This massive over-investment is driven by anxieties around long-term supplies.

This gold rush for chips is why American chip manufacturer Nvidia is one of the few companies in the AI space to actually be making money. Nvidia also invests in the companies that buy its chips - its own customers - raising concerns about circular financing.

The social licence

Beyond the balance sheet, investors are also concerned about the loss of social license for data centers amid local community protests. Community concerns around data centers are already high, driven by persistent noise (from energy transmission), visual impact, localized heating, and environmental concerns.

And these concerns will only grow if data centres start to impact the cost of living by pushing up electricity or water prices. Forecasts suggest that New South Wales data centres could consume up to 25% of Sydney's daily water demand within a decade.