Neocloud AI computing firms' shares slide, feeding fears of an AI bubble
Shares of so-called neocloud companies, which rent out computing power for artificial intelligence, have lost a quarter of their value or more in a month. Analysts point to heavy debt and dependence on Big Tech spending.
A group of companies known as neoclouds, which supply computing power for artificial intelligence (AI) development, has lost a significant part of its market value over the past month. That is intensifying worries that the AI industry may be in a bubble that could burst, BBC reports.
Market slide
Shares of the sector leader CoreWeave have fallen by a quarter in a month. Nebius, IREN and Applied Digital have seen similar or larger drops. Debt investors have also grown wary and are demanding higher returns from several firms in the sector. Last week shares tumbled after Microsoft and Google forecast lower AI spending than Wall Street analysts had expected.
Debt burden
Neocloud firms often finance themselves by signing long-term lease contracts with major tech customers, then using those contracts and the AI chips they buy as collateral for loans. Analyst Cory Johnson of the IPO research outfit The Quiet Period says lenders sometimes weigh the creditworthiness of customers such as Microsoft or Meta more than that of the firm itself. He says this helps explain CoreWeave's $35.1bn in debt. CoreWeave CEO Mike Intrator has called the market reaction "irrational" and expressed confidence in the business model.
Origins and risks
Several of these companies began in cryptocurrency mining. CoreWeave was founded in 2017, and IREN, Core Scientific and Applied Digital also started in that field. Nebius was formerly part of Russia's Yandex and split off in 2024, changing its name.
Forrester analyst Charlie Dai warns of greater financial risk if customers change their spending plans. Elon Musk has suggested that more than 200 neoclouds could face heavy losses and consolidation. Microsoft recently cancelled a deal with British firm Nscale amid power supply issues, and Australia's Firmus shelved plans to list its shares. Meanwhile, analysts at Yorkville Ives say demand for computing power still exceeds supply.
