Investors Turn Their Backs On High-Flying Domestic AI Stocks Amid Negative Sentiment

Shares of domestic artificial intelligence-related companies declined sharply last month, tracking a rout in AI stocks overseas. Across the world, investors are asking a difficult question – how long can debt-driven growth prop up a sector that has seen only a handful of profitable companies?

A surge in buying interest in global AI stocks earlier in the year had rubbed off on shares of domestic companies linked to the sector, which are seen as a proxy for the booming AI trade. Indian AI-linked companies mostly occupy the cloud, compute, and infrastructure spaces in the AI value chain rather than the pure-play rungs.

Shares of graphics processing unit leaser E2E Networks have risen 160% in 2026. Stock of the recently listed ESDS Software Solution – also in the AI infrastructure space – is up more than 35% from its issue price.

Shares of optical fibre cable maker Sterlite Technologies have risen a whopping 678% year-to-date. Shares of HFCL, another company which also makes optical fibre cables, are up more than 200%. Investors have received 50–160% returns from their investments in technology infrastructure and digital solutions provider Black Box, electronics manufacturer Syrma SGS, and fuel-cell maker MTAR Technologies.

Most of these companies have hefty order books, underpinning fundamental growth that supports bullish views on their long-term prospects.

In the near term, however, the outlook for these companies is more muddled, as the conversation shifts away from sheer capacity addition towards better utilisation, capital efficiency, and execution of outstanding orders. Consequently, shares of domestic AI-focused companies declined significantly in October.

Macro Issues Rattle AI-Linked Names

In October, shares of E2E Networks and ESDS Software declined 20–23%. MTAR Technologies’ shares fell more than 12%. Netweb Technologies and Sterlite Technologies were down 8–9%. Shares of Black Box also declined slightly, after rising for seven consecutive months. HFCL’s stock, which had risen more than 34% during the September quarter, ended just 2% higher in October.

This change in sentiment comes as investors rotate away from the crowded AI trade globally over caution regarding the debt-fuelled growth of these companies, analysts said.

“Key triggers for the correction include higher borrowing costs, concentration of technology stocks in global indices, and a potential shortfall in hyperscaler capital expenditure guidance,” Vikas Swami, Research Analyst at InCred Capital Wealth Portfolio Managers, said.

Some analysts, such as those at Choice Institutional Equities, said the premium valuations commanded by these companies will be justified only if they manage to execute orders and provide a sustainable return on invested capital. “The correction reflects a shift from AI-led optimism to greater scrutiny of actual monetisation, GPU utilisation, and return on invested capital,” they said.

Most companies in this sector trade at premium valuations, which invited a severe correction, some analysts and brokerages said, arguing that investors have aggressively priced in future profit growth.

Investors are now demanding higher yields from debt-ridden AI companies. The latest such development involved CoreWeave, Inc., a neocloud company that accumulated over $35 billion in debt. Yields on its senior notes surged to 15%, which spiked credit default swap spreads – indicating a high likelihood of default.

Easy access to credit for such companies, owing to guarantees by mega-cap companies, has also stoked worries over inflationary pressures, bringing AI projects under the US Federal Reserve’s radar. The central bank’s Chair, Kevin Warsh, last Wednesday said investment in AI is not insulated from monetary policy. “Interest rates get in the cracks. Interest rates affect directly, or indirectly, almost everything,” Warsh said.

A high interest rate environment – which seems likely amid surging oil prices and hot inflation readings – is a negative for AI companies that rely on debt to finance their booming top-line growth. Investors are also worried that hyperscalers such as Amazon and Microsoft may be spending too much on AI, which is increasingly seen as a high-risk, low-return bet.

The largest US AI hyperscalers are on track to spend $800 billion in capital expenditure in 2026 and more than $1.1 trillion in 2027, Goldman Sachs said in a report. Hyperscalers need to generate annual AI revenues of roughly $300 billion in the next few years to break even on their investments, the brokerage said.

Long-Term Investment Strategy

Back home, however, analysts are positive on the AI infrastructure opportunity and see long-term revenue visibility for players in this sector.

For companies such as E2E Networks and ESDS Software, EV/EBITDA – a measure of a company's business value compared to its operational earnings – would be a better metric, considering they are new companies with high capex requirements, Swami of InCred Capital Wealth said, adding that on these parameters, E2E Networks has delivered robust growth. “We believe the current valuation is justified and see significant upside potential in the stock,” Swami said.

In the September quarter, E2E reported a net profit compared to a loss in the year-ago quarter – a turnaround that will likely continue through FY27, Swami said. He expects E2E to report earnings per share of INR 8.1 in FY27, compared to a negative figure in the last financial year.

ESDS Software, on the other hand, may face some difficulties going ahead, according to analysts. The stock is already down nearly 40% from its all-time high, and further downside is likely, analysts said, citing lumpy revenue growth and risks of delay in GPU deployment.

The two companies, like other players in the sector, have to contend with high capital investments, depreciation, funding requirements, and execution, which warrants caution, analysts at Choice said. Current valuations leave limited room for execution delays or earnings disappointments, the analysts said, refusing to call the already sharp decline in share prices a ‘bottom’.

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