Election results spark divergent AI investment trends

The newly elected Democratic governors in Texas and Ohio, both key locations for data center investment, have signaled support for restrictions on data center development. Texas alone accounts for approximately 25% of data center construction, according to Bernstein analysts. Furthermore, voter-approved ballot measures in several localities across the country are also limiting data center projects. Democrats also secured control of both chambers of Congress.

This potential slowdown in the AI infrastructure buildout manifested in a “remarkable” way in Wednesday’s trading, according to Jim Cramer. Established cloud computing giants, which have been heavily investing in data centers and experiencing cash flow pressures, saw significant gains. Amazon’s stock rose by 7%, Microsoft increased by over 6%, and Alphabet, Google’s parent company, climbed nearly 4%. Cramer referred to these companies as “the incumbents,” noting their substantial existing data center infrastructure and strong customer demand. While AI compute demand remains robust, the market anticipates a moderation in future spending, potentially allowing for a rebound in cash flows.

Conversely, smaller, emerging cloud providers, often called “neoclouds” like CoreWeave, Iren, and Nebius, faced considerable losses. These companies, which rely on speculative bets and have weaker financial positions, experienced declines of nearly 10%, 11%, and 6.5% respectively. Their stock prices have already fallen significantly from their year-to-date highs. Cramer dismissed the idea of a complete halt to data center construction, suggesting the results would make financing more challenging, similar to the situation faced by natural gas pipelines under former President Joe Biden. This could restrict access to capital for neoclouds.

Suppliers of AI infrastructure also felt the pressure, with Eaton and GE Vernova down 9% and 10%, respectively. Even after Eaton reported a strong quarter and GE Vernova announced robust results and a growing backlog fueled by electricity demand, their stocks declined. Semiconductor companies, including Marvell, Arm, Micron, and Intel, also experienced downward pressure. Nvidia, the world’s largest chipmaker, saw a slight decrease. Qnity Electronics, a key supplier of chip manufacturing materials, bucked the trend by reporting better-than-expected results, prompting Cramer to recommend purchasing the stock.

Apple, which has been impacted by rising DRAM memory costs, saw a 6% increase, potentially benefiting from a tapering of those price increases. Cramer suggested investors who sold Apple due to margin concerns may have made a misjudgment. Ultimately, the market’s reactions appear to be polarized, and short-term volatility is expected. While the data center buildout may evolve, it is likely to continue. BMO Capital Markets analysts noted that existing projects should proceed given the underlying demand growth.