Australia is a relatively small country in terms of population, with only 28 million people. But it has become a major hub for artificial intelligence (AI) data center projects due to its vast area and favorable political climate. In fact, an Australian company called Firmus built a data center in Melbourne that hosts the largest cluster of NvidiaIt is (NVDA -0.52%) Blackwell Ultra chips across the Southern Hemisphere.
Last week, Firmus was on track for one of the largest initial public offerings (IPOs) in the history of the Australian stock market, reportedly raising around $5 billion (US dollars) at a valuation of $30 billion. The company was going to use the funds to build more data centers in Australasia to expand its customer base, which already includes OpenAI and Metaplatforms.
However, Firmus pulled the plug on its IPO at the last minute due to a lack of investor demand, suggesting that funding may be starting to dry up for the AI industry. Mounting losses at some of the world’s largest AI labs are a growing concern, and rising interest rates offer many investors a risk-free alternative for their money.
Here’s why this development could have negative consequences for semiconductor suppliers like Nvidia and Micron technology (UM -0.66%).
Image source: Getty Images.
Yet another crack in the AI boom
According to Nvidia, the five largest hyperscale companies (including Microsoft, Amazon, and Alphabet) are on track to spend approximately $800 billion on AI data center infrastructure in 2026 and could spend an additional $1.3 trillion in 2027. As a result, demand currently outstrips the supply of critical chips such as graphics processing units (GPUs) supplied by Nvidia and high-bandwidth memory (HBM) supplied by Micron.
Microsoft, Amazon and Alphabet are building this infrastructure to develop their own AI software, but they also rent computing capacity from other companies through their respective cloud platforms. This practice has become very lucrative, and Alphabet’s Microsoft Azure, Amazon Web Services, and Google Cloud have each delivered accelerate revenue growth in the quarter ended June 30.
In theory, hyperscalers will continue to build more infrastructure as long as they believe there is demand for computing capacity. But cracks are beginning to form; To cope with soaring chip and component costs, companies like OpenAI, Anthropic, and even Microsoft have significantly increased the prices for using their AI models and software in recent months.
OpenAI, for example, recently introduced a new $500 per month subscription plan for uncapped usage of its flagship models, representing a whopping 150% increase over its $200 per month plan, which was once its most expensive offering. A report from Financial Times As of Thursday, this suggests that OpenAI’s annualized revenue now stands at $50 billion, below the $70 billion previously reported by other media outlets. This could be a sign that customers are retreating in the face of rising prices.
This is not surprising, considering companies like Uber Technologies, Walmart, AT&Tand even Amazon have imposed restrictions on the use of AI on their employees this year to avoid budget explosions. In fact, a recent survey conducted by UBS Group found that 60% of companies are shifting some AI workloads to cheaper, more efficient models to reduce costs. These models generally consume less computing power than those from labs like OpenAI, which could lead to lower demand for chips.
Therefore, Firmus’ IPO withdrawal is just another sign that sentiment toward AI may be changing, at least temporarily.
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Investors could already be pricing in weaker semiconductor demand
Nvidia stock is trading at a price-to-earnings (P/E) ratio of just 29.1 as of this writing (October 9), less than half its 10-year average of 61.3.
NVDA PE ratio data by YCharts.
Micron stock is even cheaper. Its P/E ratio is just 13.9, a considerable discount for both the S&P500 And Nasdaq-100 indices, which have P/E ratios of 23.3 and 34.6, respectively. With an uncertain demand outlook and increased supply expected over the next couple of years, it appears Wall Street is betting that the data center memory boom will be short-lived.
So what should investors do? Those who already own shares of Nvidia and Micron may want to hang on and take a wait-and-see approach. Over the next month, hyperscalers will report operating results for the quarter ended September 30. If they announce a pullback in capital spending, a slowdown in semiconductor demand is almost certainly on the horizon, which could be a sign for investors to reduce their positions.
Investors who don’t already own shares of Nvidia and Micron may want to wait on the sidelines. Although they appear cheap on the surface, the market is sending a clear message that these companies may not grow earnings as quickly as initially expected over the next couple of years.
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