AI’s Supercycle: Ignore the Headlines, Follow the Fundamentals

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Since the start of the year, several headlines have cast doubt on the strength and longevity of the AI investment supercycle. Concerns have ranged from cost-efficient AI models emerging in China to speculation about hyperscaler spending cuts, creating significant volatility across AI-related equities.

It all started in January, when DeepSeek drew widespread attention for developing a new model that was substantially cheaper to train and use than Western counterparts while delivering comparable or superior performance. Then, in February, a sell-side broker report claimed Microsoft had canceled data center leases, sparking concerns about reduced AI infrastructure spending. Microsoft later reaffirmed its capex budget, stating that while geographical allocations may shift, overall capital commitments remain unchanged. In March, the Financial Times reported that Microsoft had canceled AI compute leases with CoreWeave, a private AI hyperscaler preparing for a Nasdaq IPO. Both Microsoft and CoreWeave have since refuted this claim.

These announcements have triggered heightened volatility in equities seen as beneficiaries of the AI investment supercycle, including semi-conductor, electrical equipment, power generation, and BTC/HPC data center companies—many of which remain notably lower than their January levels. While some of this pullback makes sense given stretched valuations and crowded positioning, we see further opportunities in the market.

Key Questions for Investors

Does AI’s shift toward cheaper, more efficient models force a recalibration for high-performance computing (HPC) demand, data center expansion, infrastructure investments, and power needs? This is the key question investors are working through to better determine opportunities and risks in the market. However, there are other strategic questions worth considering:

• Are hyperscalers frontloading heavy investment to prevent future compute shortages, which could pose a greater risk than short-term overspending?

• Is AI dominance a national security issue?

• And for all the fans of a good conspiracy theory: Are competitors or national actors spreading misinformation to slow down investment cycles and gain ground?

While definitive answers are elusive, investors should focus on tangible market dynamics and companies poised to benefit.

The Case for Core Scientific (CORZ)

Following a recent Financial Times report, Core Scientific (CORZ) traded below $8.00 per share. As one of CoreWeave’s largest HPC data center providers—accounting for over half of CoreWeave’s data center capacity—this reaction appears overdone and may create a potential buying opportunity. CoreWeave has agreed to lease approximately 590MW of Critical IT load with Core Scientific under 12-year agreements. Core Scientific projects over $10 billion in revenue from these leases, with an anticipated run-rate profit margin of 75-80%, translating to around $660 million in annual profit (see investor presentation on their website).

Importantly, CoreWeave is covering the capex to build these data centers for them to run Nvidia HPC GPUs. While Core Scientific will pay back $1.5 million per megawatt of capex via lease subsidies in the first few years, the remainder will be fully funded by CoreWeave. Notably, the data center assets will remain on Core Scientific’s balance sheet, allowing the company to retain ownership and benefit from their long-term value appreciation despite CoreWeave paying for most of the capex to build out these data centers.

Using a conservative $10 million per megawatt valuation for Tier 3 HPC data centers, Core Scientific’s HPC assets for CoreWeave would have a market value of approximately $5.9 billion once fully built out (expected by the end of 2027). Yet, at current valuation levels, Core Scientific’s enterprise value sits below $3 billion—less than the expected value of the data centers it will own, excluding any future cash flows from the 12-year leases or its BTC infrastructure.

For this stock price to be justified, investors would need to assume CoreWeave will either go bankrupt or cancel its Core Scientific leases—despite preparing for a roughly $35 billion IPO. We find it very unlikely that CoreWeave can meet its hosting agreements without the use of Core Scientific’s data centers. In our view, this presents a compelling near-term risk/reward opportunity for a company like Core Scientific.

Power Generation: A Longer-Term Play?

Power generation companies are expected to benefit from the AI boom, as decades of rising energy demand have further spiked the expectations of massive HPC data center construction in the U.S. Many AI data center facilities will not come online until after 2027, meaning the near-term impact on power providers’ estimates remains modest. In addition, these companies still trade at historically elevated multiples, and relative to a company like Core Scientific, are nearly 3x the valuation.

However, if AI-driven data center expansion slows and Core Scientific does not build these data centers, then the valuations for power generation companies are far too high and are not pricing in as much risk as the HPC data center providers. Investors appear to be discounting far more uncertainty in HPC data center stocks than in power generation companies, creating potential mispricing in the risk-reward equation.

A Nuanced Approach to AI Investing

These are just two examples of how investors can take a more nuanced approach to the AI investment opportunity. While recent headlines around AI infrastructure spending have driven market volatility and uncertainty, investors should not lose sight of the significant long-term growth trajectory and compelling fundamentals underpinning the sector.

Despite concerns around hyperscaler spending and more affordable AI models coming to market, companies like Core Scientific remain strongly positioned to capitalize on the sustained growth and demand of the HPC market. The fact that Core Scientific retains ownership of these data centers, with CoreWeave funding most of the upfront costs, it appears that the company's current valuation is attractive and likely undervalued.

Ultimately, volatility driven by headlines creates attractive entry and exit points for investors. Having the discipline to look past the immediate noise and focus on risk management and valuation can create alpha for investors.

At Galaxy Asset Management, we’re building products and strategies to offer investors accessible and sophisticated exposure to the digital asset ecosystem and adjacent technologies.

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