Groq Investor Warns of Data Center Speculation

A major investor in AI hardware startup Groq has raised alarms about the current state of the US data center market. Alex Davis, CEO of Austin-based investment firm Disruptive Tech, described the market as 'speculative' in a recent letter to investors. He warned that this speculative approach could lead to a 'significant financing crisis' for landlords between 2027 and 2028.

Davis's concerns are rooted in the rapid expansion of data center construction. He argues that the 'build it and they will come' strategy is a trap for speculative landlords, as major technology companies usually prefer to own their own facilities. Furthermore, he noted that the artificial intelligence boom has created numerous business models that lack realistic margin expansion. These warnings come as the number of data center permits in the US has nearly quadrupled since 2010.

Alex Davis, the CEO of Disruptive Tech, has voiced strong concerns regarding the speculative nature of the current data center boom. In an end-of-year letter sent to investors on Monday, Davis outlined the risks associated with landlords building data centers based on assumptions about future demand rather than secured contracts.

He specifically targeted the 'build it and they will come' strategy, labeling it a trap for those not already established in the sector. Davis emphasized that major players, known as hyperscalers, typically choose to own their data centers rather than lease speculative builds. He predicted that this disconnect would result in a 'significant financing crisis in 2027-2028 for speculative landlords.' In his correspondence, Davis stated, "I am also deeply concerned about the 'speculative' data center market."

Beyond the physical construction of facilities, Davis is worried about the economic sustainability of the current AI landscape. In a separate letter shared on LinkedIn, he argued that the rush to capitalize on artificial intelligence has resulted in an oversaturation of business models that cannot support healthy profit margins.

According to Davis, these ventures lack 'realistic margin expansion.' He bluntly added, "This will not end well." Disruptive Tech’s investment strategy appears to align with this caution; the firm aims to back 'owner/users' rather than speculative landlords, expressing concern over the 'stress on the system' that speculative building creates.

Disruptive Tech is a significant player in the venture capital space, particularly regarding AI hardware. The firm is a major backer of Groq, an AI hardware startup. In September, Groq announced a $750 million capital raise, revealing that Disruptive Tech had invested nearly $350 million into the company.

The investment firm's portfolio is diverse, including stakes in companies such as Airbnb, Spotify, and Slack. Additionally, they have invested in other AI-forward companies like Shield AI, Palantir, and Databricks. The funding round for Groq occurred shortly before the startup signed a massive $20 billion licensing deal with Nvidia in November.

Davis's comments arrive amidst a surge in spending on data center construction by technology companies. The scale of this expansion is significant; an investigation conducted in June revealed that by the end of 2024, companies had filed permits for 1,240 existing or planned data centers in the US.

This figure represents a nearly fourfold increase compared to the number of permits filed in 2010. Data centers are critical infrastructure facilities that store, process, and distribute large amounts of data. They require massive amounts of land, water, and electricity to operate. The rapid rate of construction has been further spurred by tax incentives offered by cities to attract these companies.