The big data centre buildout has taken a U-turn amidst growing concerns around hyperscalers’ binge borrowing. While there were many warning signs, Meta Platforms’ (NASDAQ: META) plans to create a new class of non-voting shares to fund artificial intelligence (AI) investments triggered a sell-off in AI stocks.
While AI investments are showing revenue and profits, the sheer amount of capital going into it and the depreciation that comes with it have worried capital markets. Meta’s five-year credit default swaps were trading at record highs on October 23, 2026, according to a Reuters article. This brings back flashes of the dot-com bubble and the 2008 Global Financial Crisis. Central banks in Asia have already hiked interest rates to curb inflation. If the US Fed increases interest rates by 25 or 50 basis points, the massive AI debt will trigger a huge interest cost.
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Beware of the big data centre buildout
A Gartner report warned that AI infrastructure investments are at risk of a US$4 trillion asset write-down through 2032. The concerns are valid. Unlike oil and gas pipelines, AI infrastructure depreciates rapidly. Those who have used graphics processing units (GPUs) know this. Considering the amount of capex announced for AI infrastructure through 2030, AI data centre owners would need US$8.5 trillion in revenue by 2030 to meet capex, financing costs, and a 12% return on invested capital (ROIC). Gartner does not see AI revenue crossing US$3.6 trillion by 2030.
The problem is the ticking time bomb of infrastructure upgrades. If AI data centres fail to generate sufficient revenue, raising new debt will be difficult, and outdated infrastructure won’t fetch desired revenue. Hence, when hyperscalers like Meta call for more capital, investors are giving it a second thought.
While one side of the coin raises concerns of an AI bubble burst, the other side of the coin states that AI is here to stay. What if the fears are a pullback before another rally? A good strategy is to invest in both sides of the coin.
Hammond Power Solutions is positioned for the big data centre buildout
If you believe that the AI data centre setback is temporary and another wave of investment is coming, Hammond Power Solutions (TSX:HPS) is a good stock. It builds transformers for electrification and electrical distribution networks. It has a strong order book as demand for AI-focused data centre transformers picked up in the U.S. and Mexico. The Canadian demand fell due to timing.
HPS’ stock price fell 37% between June 22 and September 1 when fears of cooling AI investment surfaced. It recovered 37% between September 2 and October 5 and fell again by 31% in October. The gap between the two dips is narrowing, showing growing investor apprehension. Even though order backlog has almost doubled year-over-year, investors have already priced in that order book. For HPS stock to grow further, AI investments have to pick up. Now is a good opportunity to buy the dip if you are bullish on the data centre buildout.
Constellation Software is positioned for the big data centre fallout
Being optimistic is one thing, but hedging your downside risk is another. As an investor, you have to look at all possibilities and diversify your money in investments that look promising.
Constellation Software (TSX: CSU) is well-positioned to benefit from the AI slowdown and offer contrarian growth. It is a software holdings company, with a portfolio of thousands of software across 100-plus verticals serving niche demands of mission-critical applications. Unlike AI data centre companies, it is not burning budget on AI migration. However, it isn’t ignoring AI either. Constellation’s operating companies are testing AI at their level. If AI investments stall or pull back, Constellation stock surges, as seen in its October rally of 16%.
Constellation continues to enjoy strong free cash flow growth from new acquisitions. Unlike Meta, Constellation has contained its balance sheet debt and is using free cash flow to make new acquisitions. Since the AI boom pulled down software stocks, it acquired stakes in some good software companies at a discount.
Investor takeaway
The contrarian stock price movement of HPS and CSU to AI investing makes them a perfect fit for a balanced portfolio.
