Shrinking Margins and a Nasdaq Rout Reset the AI Trade

The setup — The bill for the artificial intelligence buildout is coming due, and the market is suddenly questioning the margins. A broad tech selloff dragged down everything from newly public chipmakers to the companies laying the literal groundwork for data centers. When capital expenditures scale this fast, even the core infrastructure plays get caught in the undertow.

What's moving

The scale of the hardware investment required for modern computing is forcing software monopolies to restructure their balance sheets. Oracle ($ORCL) cut 21,000 jobs to help finance a debt-fueled expansion of its server footprint, prioritizing physical computing capacity over human headcount (per Ars Technica). The sheer volume of capital Alphabet ($GOOGL) is borrowing to roll out server farms has strategists arguing it now resembles an industrial company rather than a pure technology firm, paving the way for its expected inclusion in the Dow Jones Industrial Average (per MarketWatch).

Finding the power to run those servers is becoming the dominant bottleneck. The Trump administration just allocated $17 billion in loans to accelerate the deployment of ten nuclear reactors across five sites (per CNBC). At the same time, GE Vernova ($GEV) saw a major proof of concept for off-grid power plants designed specifically for AI data centers (per CNBC), reinforcing the reality that the existing grid cannot handle the load — a dynamic echoing our recent look at how Natural Gas Deals Reveal the True Cost of AI Compute.

The cost of that compute is starting to compress profit profiles. Cerebras ($CBRS) fell 10% following its first earnings report since going public in May. The pureplay AI chipmaker delivered upbeat revenue figures, but warned of shrinking margins in the quarters ahead (per CNBC) — a signal that top-line growth in silicon does not automatically translate to expanding profitability.

Featured: AXT Inc ($AXTI)

The move
Shares of semiconductor materials maker AXT Inc dropped 15.72% to close at $77.91, erasing days of rapid gains. The stock had briefly crested above $110 earlier in the week on a wave of bargain-hunting and geopolitical optimism, but sellers took control as a wider liquidation swept through the Nasdaq.

What drove it
A micro-catalyst was entirely swallowed by the macro environment. AXT announced late Wednesday that its subsidiary, Beijing Tongmei Xtal Technology, secured a long-term supply agreement with Nanjing Casela Technologies. In a healthy market, locking in future demand for specialized components usually bids a stock up. But with the Nasdaq 100 ETF ($QQQ) shedding more than 3% and volatility spiking, traders dumped the shares regardless of the underlying contract. The price action highlights a market that is currently rotating out of high-multiple infrastructure bets, unwilling to reward future revenue when present-day conditions feel fragile.

The bigger picture
AXT sits squarely in the optical networking upgrade cycle. Hyperscalers are buying thousands of accelerators, but those chips are useless if they cannot talk to each other fast enough. That requires optical transceivers. AXT makes the indium phosphide substrates — the foundational chemical layers — required for the lasers and photodetectors inside those transceivers.

Right now, the industry is in the messy middle of a major architectural transition. Traditional networking relies on pluggable optics, but the power required to push light through those connections is becoming unsustainable. The sector is moving toward co-packaged optics, a design that integrates the optical connections directly alongside the silicon to radically reduce power consumption. AXT management expects this new architecture to become a meaningful revenue driver by late 2027. Until then, the company remains highly leveraged to the broader data center capital expenditure cycle — expanding rapidly when hyperscalers write checks, but fully exposed when the market decides the infrastructure trade has run too hot.

Across the tape

Volatility returned sharply, with the VIX jumping 12.79% to cross the 19 level as technology shares sold off. The Nasdaq Composite lost 2.21%, outstripping the S&P 500's 1.45% decline.

Supply chain fears eased slightly on the geopolitical front. The U.S. issued a sweeping rollback of sanctions on Iranian oil as negotiations toward a formal peace deal progress, securing the Strait of Hormuz and unlocking billions in revenue for Tehran (per CNBC). WTI crude slipped fractionally to $72.63 on the news.

In private credit markets, SpaceX capitalized on its recent public debut. Less than two weeks after its initial public offering, the space and communications company raised $25 billion in a debt sale, drawing an overwhelming $90 billion in order demand (per CNBC).

What to watch

• Cerebras's pricing power: Following its warning on margin compression, watch for any statements from competitors or customers about AI chip pricing. If a pureplay challenger is cutting prices to win market share, it changes the hardware math.
• AXT's Q2 guidance clarity: Following its participation in the Northland Securities conference, look for concrete updates on how quickly its indium phosphide orders are converting to recognized revenue in the second half of the year.
• Hyperscaler capital expenditure revisions: With Alphabet and Oracle taking aggressive financial steps to fund their data centers, any downward revision in future capex spend will immediately hit the substrate and optical components sector.
• Nuclear loan allocations: Track exactly which utility operators receive the finalized $17 billion in federal loans. Those sites will immediately dictate where the next generation of gigawatt-scale data centers are built.