Investors Are Turning Against Data Centers (Here's Why)

Prof G Markets

The episode examines growing investor anxiety surrounding the data center buildout, specifically focusing on Oracle's recent legal maneuvers

Key takeaways

• Oracle invoked a force majeure clause regarding its Project Jupiter data center, causing significant stock volatility.
• SB Energy's attempt at a $50 billion IPO failed due to investor skepticism over its lack of operating capacity and declining revenues.
• Netflix faces an existential threat from YouTube, which leverages massive network effects without the burden of content production costs.
• The Paramount and Warner Bros Discovery merger highlights the necessity of scale in a media landscape dominated by tech giants.
• Oura's upcoming IPO shows promise through high retention rates and potential synergy with GLP-1 weight loss trends.

Main topics

• Data Center Infrastructure Risks
• Streaming Wars: Netflix vs. YouTube
• Media Industry Consolidation

Notable quotes

The competitor here isn't Disney Plus. It's a 19-year-old with a ring light.

Conclusion

Investors are moving away from speculative AI infrastructure and towar

Transcript preview

Speaker 2 (0:00) Support for the show comes from Alpha Space by Yahoo Finance. Alpha Space by Yahoo Finance is the advanced investing platform you've been waiting for. My co-host Scott Galloway is a fan of the platform. Here is what he had to say. Speaker 3 (0:14) So I have been using Yahoo Finance as my portal for finance for, I'm not exaggerating, about 30 years. I think they do a great job. Speaker 2 (0:23) You can explore Alpha Space with a Yahoo Finance Gold subscription. And right now, your first year is 50 % off. Head to yahoofinance.com slash profg. That's yahoofinance.com slash profg. Bill, there's $239.70 for the first year, then $479.40 thereafter. offer valid for new subscribers in the US. Offer ends October 31st, 2026. Speaker 1 (0:51) SpaceX had a huge opening on the public stock exchange, but their story has changed a lot since opening day. Anthropic and OpenAI are lining up to IPO next. What does that mean for them? And more importantly, what does that mean for you? What's an IPO anyway? And should you be investing in them? I'm Vivian Tu, your Rich BFF, and on this week's episode of Net Worth and Chill, we're getting into the weeds on IPOs, what they tell us, and what we should and should not be doing with them. Listen wherever you get your podcasts or watch on youtube.com slash yourrichbff. Speaker 1 (1:23) Hogging seats on Speaker 6 (1:24) a crowded train, not saying excuse me, watching videos on your phone with no headphones in. Sometimes it feels like we don't know how to act anymore. What we have been seeing increasingly is people breaking rules. Why should I play by the rules Speaker 5 (1:41) if nobody else is going to do that for me? This Speaker 6 (1:43) week on Explain It To Me, how to mind your manners. New episodes Sundays, wherever you get your podcasts. Speaker 3 (1:51) Today is number 40. That's the percentage of global container exports that come from China. Ed, this morning I decided to play Frisbee with my youngest, and it kept getting bigger and bigger, and I couldn't figure out why, and then it hit me. Speaker 5 (2:16) It's Speaker 3 (2:17) kind of cute, Speaker 2 (2:17) right? It's kind of cute. Dad jokes 101. Does it make you want to have kids? Absolutely. I can see it now. Frisbee in the backyard, playing catch. I'm already very excited. Speaker 3 (2:30) Yeah, them screaming, I hate you, and not coming home, and you're up late worried. Yeah. Yeah, that's part of it too, just so you know. Speaker 2 (2:38) Really? Speaker 3 (2:38) Just so you know. Speaker 2 (2:40) Oh, damn. Okay. It's not what they advertised. Speaker 3 (2:42) I'm having such a nice time. My son, as you've probably heard, is a freshman at college, and I call him every day to relive college. I'm having such a—I'm back at college. You're calling him every day? Let's ease up on that. I speak to both my sons every day. Speaker 2 (2:57) Wow. And maybe I just don't speak to my parents enough or didn't speak to my parents enough. So I think what you're saying is your parents didn't give you enough love. Speaker 3 (3:07) No. It's kind of my, I think of it as my, I do it for a couple of, well, I'm purchasing it right now, but it's good. I think it's more for me. It lowers my blood pressure to hear my boys' voices. But I think that. Speaker 3 (3:23) Yeah, I think it's good for both of us. You're probably right. I'm probably being quite unfair. And it's not like a long, drawn-out conversation where I give them a lesson about interpreting Odyssey for their life. It's, hey, what'd you do today? How'd you do on the biology test? Bitch, you're not working. I'm paying for everything. You need to do better. Speaker 1 (3:40) And then, you know, who are they playing this weekend? What's going on? All Speaker 3 (3:45) right. Have a good rest of the night. I love you. As long Speaker 2 (3:47) as it's quick and crisp. Yeah, you're right. Because actually, I think one of my problems with my conversations with my parents is we don't talk for a while. And then each phone call, you know, it's going to be like a 30 to 45 minute thing because there's so much context that you got to catch them up on. So yeah, maybe that's the solution. Just sort of like a one minute check in daily. It sounds like a lot though, but maybe it's good. Oh, it's such a good hack. It's pick Speaker 3 (4:12) up the phone. What's going on? What are you doing? It's such, it's like a, I'm. I'm serious. It's like an anchor for me emotionally and mentally, just hearing their voice quickly. And occasionally they don't answer, so I just call back like an obsessive girlfriend. Speaker 3 (4:28) I'm like, there's no hiding from the dog. There's no hiding from the dog. And then I start texting them and I'm like, you know, I haven't paid your tuition yet. Pick up the phone. Speaker 2 (4:39) Do you schedule the phone calls or are you just spontaneous? I Speaker 3 (4:43) try and do it around the same time so I know that they're free. I try and do it kind of like a little bit before bedtime, sort of as a, I like the idea that our conversation on the last thing is a... Speaker 3 (4:55) They do. But, you know, my dad had a similar practice with me. On the dot, every Winter Olympics, he would check in. That's good. He was consistent. Every four years. Wynne, how are you doing, you oatmeal savage? Who is this? Dad? Speaker 2 (5:15) Dad? I like that. Every four years, maybe there's a happy medium. No matter what, Ed. No matter what. Well, I was judging at the beginning, but I think you've turned me. I think you're right on this. I think every day is good. I think it's healthy. Quick, brief check-ins. I like it. Speaker 3 (5:29) If you wanted to do something, especially if you're a mom, just call her every day for 30 days and freak her out. She won't know what's going on. Hey, just checking in. Hey, just checking in. Everything good? Yep. I'm at that age now where I'm so anxious. When my friends call me, I'm literally like, I pick up and I'm like, who's that? Speaker 4 (5:50) It's, it's, but no, just, I Speaker 3 (5:52) would love, actually, this Speaker 1 (5:53) would be a great experiment to hopefully imagine Speaker 3 (5:55) your parents sound like really bright and interesting and discerning. So I doubt they listen to this podcast. Speaker 3 (6:02) I would love an experiment. Call your mom seven days straight and don't, you know, don't, what's up? Oh, nothing. I just wanted to check in. Do that seven days straight and then report back. Speaker 2 (6:13) Yeah, I think it's a good idea. Now I'm feeling bad about how often I call my parents, but that's probably a good thing. Something to reflect on. Well, it's not like they gave you life. Speaker 3 (6:26) I've totally flipped. Now that I'm the parent, I'm into guilt trips. Speaker 2 (6:31) I think it's good. A little bit of guilt is probably pretty healthy. All right, let's talk about data centers. Let's do it. We've got a lot to get into here. Speaker 3 (6:46) The Speaker 2 (6:47) data center build-out is starting to make Wall Street anxious. Last week, Oracle sent a force majeure notice to the developer of its data center project. The company wants the option to delay payments if the data center is not operational by 2028. That news sent Oracle stock down 5%. Meanwhile, several other companies tied to the data center industry have delayed their planned IPOs. One of them is SB Energy, which was supposed to go public this month, but according to the New York Times, its bankers couldn't find enough buyers at the company's targeted valuation of $50 billion. The company is reportedly waiting to go public until investor sentiment towards data centers improves. And it's not alone. Holtec Nuclear is also postponing its IPO indefinitely. And Agrico, I think I'm pronouncing that correctly, is delaying its own timeline. So, Scott, a lot of issues in data center land. We have SP Energy, which is... Quite literally, a data center company by definition was supposed to go public. It's now delaying that. We will get into that in a moment. Holtec, this nuclear services company that also delayed. And according to the CEO, it's because the business is, quote, viewed as connected to. data centers. Agrico, which is this generation company, also services data centers, also delaying. And then the big news, Oracle sending a notice to the developers of Project Jupiter, one of its biggest data center projects. And they cited what is known as this force majeure, which is essentially this legal maneuver that is designed to relieve you from any liability, any obligation, if some event happens that would prevent you from fulfilling your agreement. And a lot of people I think are correctly interpreting that as Oracle isn't sure that this whole data center build out is actually going to work out. So what happened? Oracle stock falls 5%, Blue Owl, and those are the guys that are financing the development of this data center, that stock fell 7%. So a lot of risks to the data centers, a lot of delays, a lot of red flags. What do you make of this? Speaker 3 (8:52) The only edit I would have is I think force majeure is like force of God, like something like an earthquake or a war, right? Where you have a legitimate reason to say, okay, this is just not normal business standard operating procedure and I should have an out here. So the framing here or the question is, is SB Energy the canary in the coal mine? And I would argue that it's the canary asking for... a $50 billion valuation on a mine that hasn't even been dug yet. And if Anthropic and OpenAI are having to delay their IPOs, there's just a ton of second-tier septic tank AI, dot-com AI, you know, pretending jazz hands AI companies that are not going to get out. And this company had no business going public. Let's just talk about the numbers here. $214 million in revenue, down 8%. So that's, I'm sorry, at $50 billion, they wanted to go out at 234 sales for a company that's revenues are declining. Zero operating AI data centers. This is just fucking ridiculous. This is, and I love that the markets are just gagging on this thing. Only about 9 % of contracted capacity is under construction. Essentially, what they're trying to do here is they're trying to get a $50 billion valuation on a PowerPoint with a SoftBank logo. And if you compare it to, I think the closest comp would be solar, it's worth about $1.2 billion. So credit to them for Adam Neumann-like salesmanship, trying to elevate the world's consciousness or decrease it enough such that they could fool people into paying 234 times sales for a company that's declining. Speaker 3 (10:42) The kind of the bigger story and the more important story is this kind of quote unquote Oracle's force majeure. That's an act of God clause. And when Oracle invokes force de majeure, what they're really saying is that the God is credit markets. This isn't an existential event. This is the market saying you're out over your skis. And that is, this might be the dark fiber of the cycle in the dot-com build out. Telecoms laid tens of millions of miles of fiber. You weren't around, but this is generally what happened. B2C, Pets.com, oh, wait, that's not working. Oh, wait, B2B, Internet Capital, oh, wait, that's not working. Well, I believe in the Internet, so just invest in the infrastructure. Invest in the steel in the ground. And all this money piled into Global Crossing and Cisco, and those things lost, if they didn't go bankrupt, lost 90%. And it wasn't that the fiber wasn't wrong. It was just early. And it's the definition of wrong when it goes on a balance sheet. The physical world is the real friction risk here. And that is 45 projects where $68 billion were blocked or delayed in three months and 30 to 50 % of this year's capacity is facing delays. One of the most powerful entities in this AI story right now is... senior citizen who's angry and doesn't have a lot, you know, has a lot of time showing up at a town hall. So the IP window is to tell private markets lie and public markets don't. Private markets can have stupid marks. Public markets have granular marks. And we'll say, no, we're not buying this. We're not going to let you wave your AI hands over this and turn this chicken shit into chicken salad. And when the bankers can't find a book, It means the smart money has stopped buying the story and wants to see actual progress. The K-shaped economy is a decent metaphor for AI right now or the AI trade. And that is one has cash flow like NVIDIA and the hyperscalers. And the other has quote-unquote potential like SB Energy, Holtec, the neoclouds. And the second group. is about to get very familiar with the term cost of capital. Speaker 2 (13:06) Yeah, it's kind of heartening that investors aren't buying this BS. I agree. I like this. It is BS. I think SB Energy is like the perfect example. Here is this sort of declining solar business that decided now we're going to get into data centers. They say that they have all these data centers, except they don't have any data centers. They have zero data centers that are operating, as you said. 9 % are under construction. The other more than 90 % haven't even broken ground. They keep on talking about this multi-hundred billion dollar revenue backlog, but then you kind of dig in and you realize, hold on, none of this is actually going to materialize within the next two, five, even 10 years. And then you start to realize this thing doesn't make any sense, especially at $50 billion. And that is the problem. It's like, okay. Your business is a nascent business. It's very speculative. There's a lot of risk. Let's see that reflected in your price. But they refuse to do that. They say, no, we're worth $50 billion. We're worth more than 230 times sales. We're going to go out and we're going to do this thing. And you hope that people look at it and go, no, thank you. This doesn't make any sense. And that is exactly what happened. They were rejected, clearly, when they tried to shut this thing around on Wall Street. And it seems like investors... are kind of understanding what the BS here actually is and what to look for. And we're seeing it across the board here. We're seeing it with all of these other companies. It might be what we're seeing in terms of the open AI delay. I mean, it's not totally clear why they're delaying. We know that Sam Altman said that he didn't think that it was the right time. But I think probably what he's realized is we're in an era where investors... are actually quite discerning at this point. They're not just going to gobble up your BS no matter what. And I think there are multiple dynamics here that are playing into this data center build-out risk. One of them is more of a technical risk, which is, I would say, that constructing these things is actually quite difficult. And financing these things is quite difficult because the input prices are very volatile. You have the price of memory and the price of energy and the price of GPUs and liquid natural gas. And these are all multi-year projects that can basically be terminated if they're late by even a year. So that's already a difficult thing to deal with. And it seems like a lot of data center companies are just pretending that that risk doesn't exist. Then you also have, as you point out, this demand-supply problem. which is that similar to 1999, we actually don't know what the demand will look like. A lot of people are just saying stuff. They're putting their PowerPoint decks together. They say, demand's going to go like this. We're going to have huge CAGR. It's going to be incredible. But of course, no one actually knows. And there is a high likelihood, a high probability that we will overbuild, we'll have too much supply. And then suddenly you won't be able to charge the lease rates that they're charging today. And suddenly the economics don't make sense. That needs to be recognized. And then the third thing. I think is the most important, which you mentioned, is that America hates this stuff, just flat out. 70 % of Americans oppose a data center in their neighborhood. This is becoming the issue. It's becoming almost like the midterms are a referendum on AI. Every politician needs to have an AI strategy. And it seems like most of them are just going in a direction of, it's bad. I'm going to be against it. I think that, I mean... Maybe the exception would be the president. He's been very pro-AI. But clearly, this is going to be a problem. And I just want to point you to a quote from the CEO of CoreWeave, which is another one of these neocloud companies. And to me, this really encapsulates, Mia found this quote, this really encapsulates the problem here. He said on the Q2 earnings call, he said, quote, we feel like moratoriums are not going to impact the demand for this infrastructure. which to me is like a massive vote of no confidence, because clearly this has become a problem that is too large to ignore. And yet a lot of these leaders of these data center companies are ignoring it. They're saying it's not a problem. AI is going to be great. The moratoriums won't be a problem. Clearly, this is something that needs to be actually addressed. And if you want to inspire the confidence of Wall Street, then you need to acknowledge the elephant in the room. and explain and lay out exactly how you're going to address it. I don't think these companies are doing that. And I think that is why they're getting punished when they try to go to Wall Street and they try to take these things public. The Speaker 3 (17:29) question is, is this the beginning of the correction or just a bump in the