Data Centre Doubts, AI Risks and the RBA’s Next Move

Welcome to SB Talks. Today is Thursday, October 22nd. I am Vincent O’Neill and joined, as ever, by our Chief Investment Officer, Nick Ryder. Welcome, Nick.

Nick Ryder:
Thank you, Vinnie.

Vincent O’Neill:
Today, Nick and I will be discussing the data centre darlings caught in the headlines, further unrest in France putting upward pressure on government bond yields, and the RBA’s dilemma in balancing inflation concerns with a slowing economy. Where to from here?

Welcome to all our listeners.

Data centres have been one of the market darlings in recent times, but we’re seeing some signs that the tide may be starting to turn somewhat. NextDC is the next operator in that space caught in the headlines.

Nick Ryder:
Yeah, in the case of NextDC, it’s specific to them being able to deliver their expansion of their M3 data centre in Melbourne’s west.

What’s happened there is there’s community backlash to 22-metre-high power poles being erected in nearby suburbs.

Vincent O’Neill:
In a residential area.

Nick Ryder:
In residential areas. They’ve had to push that back, and that’s cut their earnings forecasts for the next year quite substantially because of the delays in that data centre coming online.

Vincent O’Neill:
And the gap in earnings that it was meant to bring.

Nick Ryder:
Yeah. That stock is down 42%.

Vincent O’Neill:
The market’s been fairly ruthless in assessing that.

Nick Ryder:
Been ruthless, yeah. I think this is just the latest in a series of scenarios where investors are questioning data centres.

We’ve also had one of the leading data centre neo-cloud operators, CoreWeave.

Vincent O’Neill:
Maybe explain for the listeners, briefly, the neo-cloud concept.

Nick Ryder:
Yeah. The difference between a data centre and a neo cloud is that a lot of data centres just provide what they call “bare metal”. So it’s essentially a shed with power, cooling and all the infrastructure around it, and then a big hyperscaler like Amazon or Meta comes in and puts their own equipment in.

Vincent O’Neill:
Puts their hardware in.

Nick Ryder:
Puts their hardware in. So the data centre is just providing the infrastructure around that.

A neo cloud like CoreWeave, and Thermos as well, actually owns the chips inside. So they have the data centre, the power and the cooling, but they also have the chips and server racks with the GPUs that can handle a lot of AI workloads.

They potentially charge a higher margin because getting chips these days is part of the battle, so they provide the full solution.

Vincent O’Neill:
And price accordingly.

Nick Ryder:
And price accordingly.

Vincent O’Neill:
Sorry to bring you back to your comment about CoreWeave.

Nick Ryder:
CoreWeave is a neo cloud. They actually started out as a crypto miner and then pivoted to AI in recent years. They have a lot of NVIDIA GPUs, which puts them in a very good position.

Their stock is down 30% this month. These businesses have huge growth plans and need to build more data centres, which requires a lot of capital.

Vincent O’Neill:
Huge capital outlay requirements.

Nick Ryder:
Huge capital outlays.

What we’ve also seen is their 2031 bonds, which were issued a few months ago at a yield of just under 10%, have sold off from 100 cents on the dollar down to 80 cents. That implies a yield of around 15%.

So investors are demanding a much higher return to own CoreWeave bonds.

We’ve also seen this week a South Korean data centre builder called Eleas complete an IPO. Its stock fell 32% on the day of listing.

There’s another company called Iren, an Australian company listed in the US, whose stock is also down around 30% month to date.

Investors are questioning the economics of data centres, the amount of capital these businesses require going forward, and the valuation attached to them.

Vincent O’Neill:
Ultimately, it comes back to price.

Nick Ryder:
Exactly.

I think another thing we’re seeing in Australia, with NextDC being the poster child and Goodman Group cancelling its plans to build a data centre in Lane Cove, is community backlash.

Vincent O’Neill:
And we know this has been a big thing in the US already. It’s highly politicised.

Nick Ryder:
A big thing in the US.

Now people are saying maybe these growth plans won’t happen as quickly as expected. Maybe new data centres are delayed.

That has consequences for the economics.

For existing data centres it’s actually positive because capacity constraints allow them to charge higher prices. But for others, it means a slower return on investment.

There are going to be winners and losers.

Vincent O’Neill:
A tougher pathway to roll out an expansion or build plan, with more questions around location and the supply of critical resources like power and water.

Perhaps we’ll see a bit more rationalisation in the space.

Nick Ryder:
We also got a peek at the Anthropic prospectus this week. They’re potentially planning a listing in the next few months and are expecting to spend $750 billion on capital expenditure to build data centre capacity, whether directly or via public clouds and partners.

That’s a huge part of their growth strategy.

Vincent O’Neill:
And that’s part of the question. AI has been a major source of projected demand for data centres, but if the supply of compute isn’t there, can the objectives of some of these frontier models actually be reached?

To be confirmed.

Nick Ryder:
Yeah.

Vincent O’Neill:
On a related note, while AI brings productivity benefits, it also introduces risks.

Explain what we’re seeing with this PHP software weakness that hit the headlines overnight.

Nick Ryder:
PHP has been around for a long time. Apparently around 70% of web servers use it.

It’s open source, meaning it’s maintained by volunteers rather than a single company.

Vincent O’Neill:
That might sound surprising, but as you’ve explained, it’s not all that uncommon.

Nick Ryder:
That’s right. Much of the world’s software sits on top of open-source software maintained by volunteers.

Linux is a great example. It’s an operating system that competes with Windows and MacOS, and it’s entirely open source.

The challenge is that volunteer developers don’t always have large budgets to spend on AI tools and testing.

OpenAI actually provided access to ChatGPT, and the PHP team used it to run cybersecurity scans for vulnerabilities. They found one in August.

Vincent O’Neill:
So they stress-tested their own software.

Nick Ryder:
Exactly. ChatGPT was able to exploit the vulnerability within seconds.

They spent the following months quietly patching the issue before it became public, but the vulnerability leaked on a hacker forum, forcing them to bring forward the patch release.

Vincent O’Neill:
And this includes government websites?

Nick Ryder:
Government websites, yes.

Vincent O’Neill:
Unfortunately, this feels like a theme we can expect more of in future.

Nick Ryder:
It’s an arms race between software providers and hackers looking for vulnerabilities. I don’t know who’s going to win.

Vincent O’Neill:
You introduced a new term this morning: Patchmageddon.

Nick Ryder:
Patchmageddon. I can’t take credit for it, but another strategist coined the phrase and I think it’s apt.

Vincent O’Neill:
We’ve gone from the AI SaaS-pocalypse to AI Patchmageddon.

Excellent.

Moving to the RBA, the latest minutes seem to have increased the probability of a November rate move.

Nick Ryder:
The minutes were certainly on the hawkish side.

The discussion centred around limited economic capacity, whether rates were restrictive enough, and where the NAIRU sits.

Then deputy governor Andrew Hauser gave a fireside chat where he said the inflation outlook looks materially worse than projected in the August Statement on Monetary Policy.

Those two developments have increased the implied probability of a November rate rise from around 20% to around 60%.

Vincent O’Neill:
A meaningful shift.

Nick Ryder:
Definitely.

A lot of economists had assumed the RBA was finished, but clearly it’s still concerned about inflation.

Vincent O’Neill:
And clearly trying to communicate that.

Nick Ryder:
Exactly.

At the same time, we’ve seen a slightly weaker employment report. Unemployment has risen to 4.7%, around half a percentage point above where it was earlier this year.

So there is evidence of softening in the labour market and the RBA has a dual mandate to consider.

Vincent O’Neill:
A delicate position for them.

Nick Ryder:
Very delicate.

A good report from CBA’s economics team framed the challenge well.

On one hand, cyclical forces point to a slowing economy. House prices are falling, unemployment is rising and rates are already restrictive. That argues for a pause.

On the other hand, structural forces point in the opposite direction.

Low productivity is restricting the supply side of the economy. Consumers continue to spend. NAB’s consumer spending report showed spending rose 1.1% in September and 0.7% even after excluding fuel.

Discretionary spending has risen around 9% over the last year.

You’ve also got strong government spending and the AI investment boom.

Those longer-term forces suggest rates may need to remain higher for longer.

So it’s a genuine dilemma for the RBA.

Vincent O’Neill:
Not necessarily done yet.

Nick Ryder:
Definitely not.

Vincent O’Neill:
We’ve spoken a lot about bonds recently.

France is back in the headlines and, unfortunately, not for good reasons.

Behind the protests and unrest, we saw French government bond yields move above 5%.

Nick Ryder:
That’s the highest level since 2002.

The spread to German bunds has widened significantly, from around 60 basis points to more than 150.

France has genuine fiscal challenges. Debt-to-GDP is around 120%, and their budget deficit is about 5.4%.

Importantly, this isn’t happening during a recession.

Vincent O’Neill:
No, we’re not talking about a recessionary environment.

Nick Ryder:
Exactly.

The government has attempted to rein in spending, including in education, and that has triggered a strong public backlash.

They’ve also repeatedly tried to raise the pension age from 62 to 64, which remains controversial.

Presidential elections are due in April, so both Marine Le Pen and Jean-Luc Mélenchon are trying to capitalise on the situation.

Vincent O’Neill:
Two very different political responses.

Such is modern politics.

People often gravitate towards extremes during periods of social and economic stress.

Let’s finish in the US.

Inflation data came in slightly hotter than expected.

Nick Ryder:
Yes. Core goods inflation was the highest since January 2025, and core producer prices rose 5% year-on-year, the highest reading since the Ukraine conflict.

At the margin, that reinforces the case for further action from the Federal Reserve.

Markets are pricing roughly a 90% chance of another rate hike before year-end.

Vincent O’Neill:
Likely after the midterms.

Nick Ryder:
After the midterms.

Vincent O’Neill:
Finally, earnings season.

SpaceX has had a volatile period since its IPO but appears to have delivered a strong result.

Nick Ryder:
It delivered a profit of around $4.4 billion for the quarter.

Part of that came from monetising excess data centre capacity. Their Grok chatbot hasn’t been as successful as some competing models, so they’ve rented spare capacity to companies such as Anthropic and potentially Meta.

That may become a meaningful source of revenue.

The space business is also performing well.

Tesla also delivered a respectable result, helped by lower capital expenditure on robots and robotaxis.

There are reports the two companies are exploring a merger.

Vincent O’Neill:
Committees have reportedly been established to investigate the proposal, and Elon Musk has apparently recused himself because of conflicts of interest.

We will see.

Nick Ryder:
There does feel like an element of inevitability about it.

The challenge is valuation.

Tesla’s share price has gone nowhere for several years, while SpaceX remains a higher-growth business.

Working out the value exchange between those two businesses will be important.

There are genuine synergies too, including chip development and AI capabilities.

Vincent O’Neill:
Flying cars goes without saying.

Nick Ryder:
Flying cars and robots, of course.

There are definitely overlaps.

Vincent O’Neill:
We’ll watch this space. It may prove to be an entertaining story, if nothing else.

Very thorough as always, Nick.

Thank you very much, and thank you to all our listeners.