Markets have taken fright.
The companies at the centre of the debate are not household names. CoreWeave, Nebius, IREN and Applied Digital run warehouses of expensive computers and lease them to major AI developers including Anthropic, OpenAI and Meta. According to the BBC, these so-called neocloud firms have become the subject of one of Silicon Valley's most heated arguments, as investors ask whether their finances are sound and what their recent stumbles say about the wider AI economy.
The business model explains much of the anxiety. Neoclouds typically sign long-term lease contracts with large tech customers needing rapid access to computing power, then borrow against those contracts and the AI chips they buy. Cory Johnson of the IPO research outfit The Quiet Period told the BBC that debt is common across the sector because the hardware must be paid for up front. He argued that lenders sometimes weigh the creditworthiness of customers such as Microsoft or Meta more heavily than the borrower's own, which he said helps explain how CoreWeave accumulated $35.1bn in debt.
Markets have taken fright. CoreWeave's stock lost a quarter of its value over the past month, the BBC reports, and shares in Nebius, IREN and Applied Digital fell by similar amounts or more. Debt investors are also demanding higher returns from several firms. CoreWeave chief executive Mike Intrator has called the market's reaction irrational and expressed confidence in the model. Forecasters are blunter: Gartner predicts that by 2030, 80% of neocloud firms will cease independent operations, while Forrester expects at least three to be acquired imminently as finances grow shaky. Treasury Secretary Scott Bessent sought to play down the concerns on CNBC, describing the firms as a small component of the overall ecosystem.
Much of the sector grew out of crypto mining, whose physical infrastructure proved well suited to AI when ChatGPT arrived in 2022. Nebius is an outlier, having been part of Russia's equivalent of Google before splitting off and renaming itself in 2024. Their fortunes now rest on the spending plans of the AI developers and hyperscalers they serve. When Microsoft and Google this past week forecast less AI spending than Wall Street had projected, neocloud shares tumbled. Melissa Otto of S&P Global's Visible Alpha Research described an enormous injection of spending and an arms race, while Forrester's Charlie Dai said the trade-off of the model is greater financial risk when conditions change.
The sector's future also depends on continued borrowing, which becomes costlier as interest rates rise. Elon Musk suggested in a social media post that more than 200 neoclouds could face consolidation, with the smallest most vulnerable. Microsoft recently cancelled a deal with the British firm Nscale amid power supply issues, and Australia's Firmus shelved plans to sell shares to the public. Analysts at Yorkville Ives note that demand for computing power still exceeds supply. What remains unconfirmed is how quickly the predicted consolidation will arrive, and whether the AI spending cycle holds.
