Elon Musk sees a near-extinction level collapse coming for the neocloud sector. That sounds worrying for leaders CoreWeave and Nebius but shareholders shouldn’t panic.
CoreWeave and Nebius both briefly sank more than 3% in Monday’s premarket. That would add to a more than 30% fall in the past month amid concerns about heavy borrowing, which are being sharpened by Musk’s comments.
“As of the past few weeks, debt markets have almost entirely shut off access to money for any company that doesn’t have substantial revenue independent of AI data centers,” Musk wrote in a post on social-media platform X on Sunday. “That means the 200+ neoclouds are going to see guppy-level death and consolidation. Some will make it through, but not many.”
(Guppies are small colorful tropical fish, popular as aquarium pets and with a distressing tendency to die easily. Neoclouds like CoreWeave and Nebius are companies providing additional cloud-computing capacity for artificial intelligence.)
It’s certainly a tough time for neoclouds as yields surge on their debt, with investors demanding higher returns to compensate for the perceived risk of their borrowing. That threatens to throttle data-center construction. And unfinished data centers could spell disaster, delaying the returns from renting out cloud capacity required to cover the interest costs.
But it’s worth remembering several things. First, Musk is talking down his rivals as SpaceX has a large cloud business and would benefit from fewer neoclouds to compete with. Secondly, CoreWeave and Nebius are the biggest neoclouds with the largest, most credit-worthy clients, meaning they have the most reliable revenue streams. And finally, CoreWeave and Nebius have backing from chip maker Nvidia, which has invested in both companies.
CoreWeave has previously said its revenue backlog should more than support the payment for all of its debt obligations, without needing customers to renew their contracts or finding new tenants for the properties. Nvidia CEO Jensen Huang has said his company doesn’t need to backstop CoreWeave as its financial strength is improving. But that doesn’t mean he might not step in if things get worse.
“Even if credit markets tighten, there are potential levers for CoreWeave to reduce its need for external debt and to access alternative capital sources, including private credit, vendor financing and potentially selling larger equity stakes,” UBS analyst Karl Keirstead wrote in a research note Friday.
Keirstead pointed to Nebius securing a $3.5 billion credit facility with Citi just last week as an example of capital continuing to be available for neoclouds. And the latest technology company earnings show no signs of a slowdown in AI investment.
“Restoring confidence will be a multi-quarter fix and in the interim, we can see a near-term scenario in which CoreWeave shares trade sideways/poorly,” Keirstead wrote. “Over a longer time horizon, we remain constructive and therefore Buy-rated and are not inclined to walk back our views with no real degradation in the underlying fundamentals.”
He kept a Buy rating on CoreWeave stock although he lowered his target price to $105 from $120. Shares closed Friday at $54.24.
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