'Booming' Data Center Demand in Focus as AI Struggles to Find Computing Power
Hyperscalers, fearing being left behind in the AI race, are throwing capital at everything.
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After another robust day for the market, the indexes are mixed on Tuesday morning. Jerome Powell is scheduled to make his first public comments since the Fed's quarter-point cut, and later this week, PCE inflation news will be released.
While investors will be watching economic news closely, they have embraced the Fed's dovish pivot, and that is providing a steady tailwind as we head into third-quarter earnings season. It is expected that profits for the S&P 500 will increase by a very solid 7.7% in the third quarter, which is offsetting any worries about a slowdown in employment.
What is of particular interest is the booming demand for data center capacity. Barclays says that hyperscaler shortages are likely to continue through early 2026.
Wells Fargo upgraded CoreWeave CRWV because demand is "too strong to ignore." The analyst upgraded CoreWeave to Overweight from Equal Weight with a price target of $170, up from $105. The company will benefit from the build cycle elevated and hyperscaler industry shortages into 2026, the analyst told investors in a research note.
A deal between OpenAI and Nvidia NVDA could produce $35 billion in additional revenue for Nvidia. Nvidia is making an investment in OpenAI, and OpenAI will then use the funds to buy AI chips from Nvidia.
While there are concerns about market valuation, this demand for data center computer power illustrates how the market has not fully appreciated the tremendous growth. The hyperscalers are throwing capital at everything and are afraid they will be left behind if they don't keep spending billions.
The bears may call this bubble action, but it still appears to be quite early in the cycle. The one certainty of bubble action is that it continues longer and goes much higher than seems prudent or possible.
There are plenty of stocks that could use some rest and consolidation, but in this sort of market, the underlying support is extremely strong, and the likelihood is that corrective action will take place mainly through choppy action rather than significant downside.
This is a market for stock picking, and the data center group looks like it will receive plenty of attention.
At the time of publication, Rev Shark was long NVDA and CRWV.
