Meta and Tech Giants Face Stock Sell-Off Amid AI Spending Concerns

Investors sold Meta Platforms and other companies central to AI investment on Thursday after Meta announced plans on Wednesday to raise funds through a new share class. Meta shares dropped 8%, the biggest fall since July. SpaceX shares lost 9%. Nvidia, a major indicator of sentiment toward AI investment, declined 4%. The Nasdaq Composite was heading toward the largest decline in four months. Lam Research shares plunged 10% following the semiconductor company's results. The Lam Research decline also hurt sentiment and helped push the semiconductor index to the biggest decline since July.

Meta said on Wednesday that nonvoting Class C shares would finance AI spending and other priorities. Meta increased the lower limit of the annual spending forecast from $130 billion to $135 billion. Meta left the upper limit at $145 billion. That spending level will require substantial investor participation in future stock sales. Meta reported negative free cash flow of $2.12 billion in the third quarter, against positive free cash flow of $10.63 billion a year earlier. Meta had not experienced a cash burn for more than a decade.

Technology companies have borrowed substantial amounts over the past year to finance AI investment. Wall Street now expects higher interest rates to lead companies such as Meta to sell billions of dollars in stock for further construction. Those stock sales would increase outstanding shares and put downward pressure on share prices. The returns from the long-term AI infrastructure project remain uncertain and will probably be distributed unevenly. Major US stock indexes remain close to record highs despite a month of volatile trading.

Miller Tabak chief market strategist Matthew Maley said questions about investment returns triggered the selling. Maley said investors increasingly recognize that the returns will take much longer to arrive. Great Hill Capital chairman Thomas Hayes also identified concerns about investment returns as central to the selloff. Hayes additionally cited reported comments by Nvidia CEO Jensen Huang about financing constraints for smaller AI companies as contributing to the selling. Dakota Wealth senior portfolio manager Robert Pavlik said rising spending, negative free cash flow and insufficient revenue from that spending were worrying investors.

Credit default swaps measuring perceived default risk among many major AI companies have risen over the past year. Meta's credit default swaps reached a record on Thursday, reflecting uncertainty about the eventual beneficiaries of current spending. New indications of market pressure to reduce AI spending quickly developed into a broad stock selloff on Thursday. Expectations that reduced AI investment would weaken US growth drove a sharp increase in Treasury prices. Nomura Securities strategist Charlie McElligott wrote that markets appeared to be reassessing the likelihood of a US growth scare following the AI downturn.

The selloff intensified pressure on neocloud companies involved in constructing AI infrastructure. Nebius fell 7% after announcing a new $3.5 billion credit line from Citigroup. CoreWeave shares dropped 9%. CoreWeave's unsecured bond yields had surged to 15% during last week's AI selloff. Bank of America analyst Tal Liani maintained a buy rating and a $140 price target for CoreWeave on Thursday ahead of next month's earnings report. However, Liani said CoreWeave would need to raise $20 billion to meet customer commitments, illustrating the financing concerns affecting technology investors. Maley said investors were not concerned about Meta, Amazon or Google obtaining necessary financing. However, Maley said prohibitively expensive financing for smaller companies could unsettle investors without a broader collapse.