US Midterms Shift AI and Chip Sectors Amidst Server Farm Concerns

The Democratic gains in the US midterm elections have fueled concerns about potential future restrictions on power-intensive server farms, which could impede the rapid growth of the AI and semiconductor industries. These election results have generated apprehension among numerous AI companies, casting doubt on their substantial investments.

Elon Musk is among the immediate beneficiaries of the Democratic victories, particularly the win of Democratic candidate Gina Hinohosa over Republican Governor Greg Abbott in Texas. This outcome could slow the expansion of SpaceX in Texas, a state that has become a central hub for the company's operations. SpaceX manufactures its Starship spacecraft in Texas, a key growth engine for the company and its satellite businesses. Tesla also faces over-reliance on Texas, with its Gigafactory producing parts for Model Y and Cybertruck vehicles, and Musk's planned launch of its robotaxi service there.

AI stocks, including those of neo-cloud companies specializing in building and leasing server farms for AI processing like CoreWeave and Dutch firm Nuvias (with Israeli founders), have also declined. Texas currently hosts about 10% of US server farms, consuming 4 gigawatts of electricity. However, favorable conditions like cheap land and relatively good infrastructure have made it a prime location for new farm construction, with projections indicating a rise to 40 gigawatts, approximately 27% of all planned US server farm developments.

During her campaign, Hinohosa pledged to increase oversight of new server farm construction, approving them only after ensuring they would not negatively impact local water and electricity prices. CoreWeave, which has secured long-term, low-price contracts and leveraged debt, faces a complex situation regarding its ability to repay its loans. Conversely, major tech companies like Alphabet (Google), Nvidia, Microsoft, and Meta Platforms saw stock increases of 1%-2%, with Amazon.com surging nearly 4%. Oppenheimer analyst Sergey Vashchuk suggests that a slowdown in server farm construction could benefit Big Tech, as it might reduce rapid cash burn and increase profitability. He also noted that this slowdown would empower existing server farm owners, like Big Tech firms, to charge higher prices for AI services due to reduced new supply.

SpaceX is identified as a primary casualty, being a relatively late entrant into the server farm trend. Vashchuk estimates Musk currently has 3 gigawatts of servers and is planning an additional 20 gigawatts by the end of 2027. Hedge fund founder Shahar Cohen links Musk's accelerated plans for space-based server farms to the election results, suggesting that while Texas imposes construction limits, space offers a regulatory-free environment. Google also announced a $15 billion server farm investment in Malaysia around the same time.

Dr. Ilan Gildin, former Chief Economist of the Securities Authority, argues that the situation is more complex than a simple Democratic push to slow AI infrastructure. He points to significant representation within the Democratic party from labor unions that view server farms as job creators. Furthermore, server farm construction can accelerate the deployment of solar power plants, a priority for Democrats, potentially replacing fossil fuel plants. Israeli solar companies like Doral and Enlight saw stock increases, as did US solar firms First Solar. Nvidia and AMD might raise prices due to potentially lower chip purchases, while chip equipment and testing companies could be negatively impacted. Despite this, Nova and Camtek, which trade in Tel Aviv, saw gains.

Vashchuk believes the slowdown trend was already priced into recent market declines for chip indices and companies like Google and Intel, citing the immense cost of building new server farms. The health sector and health insurance are expected to benefit from new subsidies, while pharmaceutical companies may face public pressure to lower prices. Crypto and defense industries could face uncertainty and reduced Pentagon budgets, respectively. Gildin suggests a divided government is positive for markets as it limits drastic legislative changes, though it may hinder budget approvals and debt ceiling increases.