Shares of TeraWulf (WULF 1.29%) flew higher in August, finishing the month up 83.1%. The massive gain came as the S&P 500 (^GSPC -0.41%) rose 3.5% and the Nasdaq Composite (^IXIC -0.63%) rose 3.9%.
TeraWulf, a Bitcoin miner and high-performance computing (HPC) infrastructure company, announced a multibillion-dollar lease agreement with an artificial intelligence (AI) data center operator that is guaranteed by Alphabet's Google. The deal represents one of the largest data center partnerships to date in the current race to expand AI compute capacity.
Google's $3.2 billion promise sends TeraWulf shares flying
On Aug. 14, TeraWulf announced a major colocation deal with Fluidstack, an AI cloud provider, and then followed up just days later to announce that Fluidstack had exercised an option that expanded the deal.
In total, TeraWulf is now contracted to provide more than 360 megawatts of compute capacity in a deal worth $6.7 billion. What really drove shares skyrocketing, however, was the news that Google would "backstop" the lease agreement, promising to compensate TeraWulf up to $3.2 billion if Fluidstack failed to make the payments it was obligated to.
In exchange, Google receives warrants to acquire TeraWulf stock. If exercised, Google would own roughly 14% of the company.
Image source: Getty Images.
The AI data center race is on
This deal reflects the unprecedented scale of big tech's investments in data centers. Google, Amazon, Microsoft, and Meta Platforms are collectively expected to spend roughly $400 billion on data center infrastructure this year alone, following an estimated $350 billion in 2024. Several deals have been inked since TeraWulf's, including Microsoft's latest with Nebius, worth nearly $20 billion.
To put that collective spending into perspective, adjusted for inflation, the United States government spent approximately $280 billion over 10 years to send Americans to the moon.
While the AI infrastructure boom presents enormous opportunities for TeraWulf and other data center providers, it also carries significant risks that investors should carefully consider.
TeraWulf is walking a tightrope
Big tech companies are offloading some of the risk on to companies like TeraWulf, protecting their downside if the AI boom should cool. TeraWulf and its peers do not have the organic cash flow that could remotely support the build-out. They are instead relying on accumulating burdensome debt or selling stock, which dilutes shareholders.
Soon after the Fluidstack announcement, TeraWulf announced an offering of convertible senior notes, which it quickly upsized, bringing the total to $1 billion.
If there is an overbuild or AI demand sags -- and that is a very real possibility -- TeraWulf and other data center companies could find themselves in a bind.
