Tech stocks are under pressure after the US midterms raised fresh questions about the data centre buildout.
We understand the caution. But this looks like another supply hurdle rather than a bubble bursting, and demand, which matters most, is holding firm.
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Why have AI stocks been selling off?
It's been a bruising few weeks for tech investors.
Mixed results from the cloud giants had already knocked sentiment. Then the midterms added another worry. Democrats did better than markets expected, and that’s led to a wave of fears around the artificial intelligence (AI) buildout.
The worry is simple. If projects get slowed down, that could hit the supply chain behind them. It could also put pressure on companies that borrowed to fund their buildouts and need those sites up and running to pay off the debt. We can understand why investors are choosing to sell first and ask questions later.
This is not a bubble bursting
If we look at what's actually driving this sell-off – everything that's changed sits on the supply side.
That's not new. For the last two years, the AI buildout has run into one supply bottleneck after another. Power has been hard to secure, suitable land has been scarce, and chips and other key parts have been in short supply. Political friction over where data centres can go is just the latest addition to that list.
In our view, those bottlenecks have ironically helped ensure that this buildout has not turned into a bubble in the first place. Because new capacity has come online gradually, the industry has stayed in a position where demand runs ahead of supply, and that's a healthy place to be.
Demand is what matters
If this were a bubble bursting, we'd expect to see real cracks in demand. Customers would be pulling back, orders would be getting cancelled, or spending plans would be getting cut.
We are not seeing any of that. The signals on demand remain strong.
Could data centre growth slow down?
We think the initial fear that data centres will simply be scrapped is an overreaction. Campaigning and governing are different things.
Our expectation is that builders and policymakers will find a workable middle ground. That's likely to include support for local communities, measures to stop electricity bills climbing sharply, and proper consideration of environmental impact.
It's in everyone's interest to get there. Data centres bring investment, jobs and tax revenue, and they're becoming a meaningful contributor to growth in many states.
A longer, smoother cycle
Our mental picture points to strong demand with supply arriving at a potentially slower pace. That does not remove the need for the chips, power, cooling, memory and buildings behind AI. It just spreads that need over a longer period.
One of the big concerns for the sector has been that earnings are close to a peak. Like earlier bottlenecks, this one has a decent chance of supporting a smoother, more durable earnings cycle instead.
What the stock sell-off means for investors
It's understandable to feel uneasy during a sell-off like this one. For longer-term investors in the tech space, though, we'd urge a focus on demand, and that still looks very strong.
We think the current weakness could be an opportunity for those with the right risk tolerance and an already well-diversified portfolio.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.