Nebius Stock Falls, CoreWeave Steadies After AI Selloff. Why Another Shoe Could Drop.

Neocloud companies are providing additional AI data center capacity to big technology companies. (Vladimircaribb/Dreamstime)

Key Points

• CoreWeave fell 16% and Nebius dropped 7% after their revenue guidance and quarterly revenue growth, respectively, missed market expectations.
• Neocloud companies like CoreWeave and Nebius face risks from significant capital expenditure and debt burdens for data centers.
• The business model’s viability depends on assumptions about the useful life and rental value of expensive Nvidia AI chips.

Some of the hottest artificial-intelligence infrastructure stocks have cooled off after earnings. CoreWeave and Nebius were slipping further Wednesday after poorly received earnings triggered debates about the useful life of their hardware.

CoreWeave, Nebius, and peers such as IREN have surged this year on the back of multibillion-dollar contracts to provide AI computing capacity to large technology companies. The so-called “neocloud” companies are benefiting from AI demand outstripping supply.

However, as Barron’s has previously written, their strategy comes with risk, taking on significant capital expenditure and debt burdens to put up the data centers to power their revenue growth. That leaves them exposed to any slowdown and makes them the likely first victims if AI investment does turn out to be a bubble.

We got a glimpse of how quickly things can turn sour as CoreWeave fell 16% on Tuesday, with its revenue guidance falling short of market forecasts due to one of its partners falling behind in data-center development. Meanwhile, Nebius dropped 7% as even its more-than-fourfold quarterly revenue growth missed expectations. IREN lost 4.6% while smaller companies such as Cipher Mining and TeraWulf also fell.

That doesn’t mean a bubble is popping, with the current issue looking to be more about the ability to meet demand.

CoreWeave stock was down a further 0.5% Wednesday, with the company announcing it had expanded its revolving credit facility—a corporate credit line —to $2.5 billion from $1.5 billion and extended the maturity date from May 2028 to November 2029.

“We value the partnership with our banking partners. This financing expansion demonstrates their leadership in the evolving AI landscape and acknowledges CoreWeave’s strong credit profile and growth prospects,” said Brannin McBee, chief development officer at CoreWeave, in a statement.

However, Nebius was down 6.4% in early trading. High expectations and high valuations create the potential for volatile moves.

That’s fertile ground for short sellers—investors betting on a drop in the stocks. Famed short sellers Michael Burry and Jim Chanos have both publicly criticized the assumptions behind the neocloud model—in particular whether the pricey Nvidia AI chips they are buying now will hold their value.

Different assumptions about the useful life of a current-generation AI processor and how much it can be rented out for over its lifetime can make or break the business model. For example, CoreWeave assumes its chips have a six-year depreciation period, whereas Nebius uses a four-year span. That can be the difference between hundreds of millions in depreciation costs annually.

So far, the optimists appear to be winning. CoreWeave CEO Michael Intrator told analysts that one of its customers renewed a contract to use Nvidia H100 graphics-processing units (GPUs)—a chip that first came out in late 2022—at a price within 5% of the original agreement. But the question is whether that level of demand will be sustained over the long term.

“In the future, we’ll look for duration of GPU lives and potential impacts from the release of the next generation [Nvidia] Ruben GPU, potentially changing this dynamic, but early pricing stability is a welcome sight,” wrote Cantor analyst Thomas Blakey in a research note.

Shareholders will have to hope that stability can last.

Write to Adam Clark at adam.clark@barrons.com