The Litmus Test of the AI Market: How to Assess the Prospects of NeoClouds?
CoreWeave managed to reassure investors somewhat this week with its earnings report. The company said it expects to become profitable in the first half of 2028. Photo: Casimiro PT / Shutterstock.com
The quarterly reports of the three leading players in the neocloud sector—IREN, CoreWeave, and Nebius—released over the past week have triggered double-digit fluctuations in their stock prices. Analysts are debating whether these companies will be able to turn demand for computing power into sustainable profits—and when that might happen.
Three reports—one problem
The issue of financing turned out to be one of the main topics in the financial reports of the three companies.
The comments on IREN's earnings report from last week can be applied, more or less, to the entire non-cloud sector.
The results exceeded expectations, and the stock rose 20%. In IREN's earnings report, investors were particularly drawn to the announcement of a new five-year contract under which the customer prepaid 90% of the cost of the chips.
However, JPMorgan analysts were more cautious than the market.
We remain cautious about the capital intensity of the non-cloud-based business model, as IREN is responsible for both the capital expenditures for data centers and the costs of graphics processing units and related equipment.
CoreWeave, for its part, was able to convince investors that it is in good shape regarding fundraising for the foreseeable future. As a result, its stock soared nearly 25% on Wednesday, November 11. However, analysts noted that uncertainty remains in the longer term.
Investors were pleased to see that, by the end of September, the order backlog—which represents CoreWeave’s future revenue—had reached $132.5 billion (up from $104 billion three months earlier). However, the company needs significant additional capital to cover data center expenses and turn a profit, and raising that capital in the near future—at least through the same channels as before—does not appear feasible, notes The Wall Street Journal. Meanwhile, CoreWeave plans to increase its data center capacity from the current 1.7 GW to at least 8 GW by 2030 (enough electricity to power 7 million homes).
Nebius shares, on the other hand, fell at the close of trading on Thursday, November 12, by 16.8% (during the trading session, the decline reached 23%), even though third-quarter revenue exceeded forecasts—$980.8 million versus $918.5 million, according to Bloomberg.
The fact is that the company announced that some of the revenue it had planned to generate in December will now not be realized until 2027. It has lowered its revenue forecast for the current year to the lower end of the range, at $3–3.4 billion.
"This report will likely be viewed as generally negative, given the downward revision of the sales forecast for 2026 and the adjustment to the forecast for 2027," analysts at Vital Knowledge said.
Analysts at CCB and Bank of America, who provide forecasts for the net income and losses of cloud providers through 2028, expect Nebius and the smaller IREN to remain unprofitable during that period. Nebius itself has reported that it plans to reach breakeven (before taxes) by the end of 2027. CoreWeave, meanwhile, expects to post adjusted earnings in the first half of 2028.
There is currently a divergence in the positions of technology companies and investors, says Jon Trisi, publisher of the Fuller Treacy Money investment newsletter. Investors say, “You’ve spent so much money—including the money we invested in you. Where are the profits?” The companies respond, “There will be profits, because our supply of computing power still lags far behind demand.” Investors say, “No, we want profits now.”
The most important thing is money and its value
Neoclouds purchase graphics processing units and other chips for AI operations, build or lease data centers, and sell computing power to major technology and other companies. Because of their specialization, they have become a litmus test for investor sentiment toward the AI sector.
Doubts about the profitability of cloud-only companies have been mounting for about half a year, which is why, by fall, the stock prices of the sector’s largest players had fallen by tens of percent from their late spring–early summer peak. Investors are wondering whether the massive expenses for AI development—which neo-clouds finance primarily through debt—will pay off, the WSJ notes. Servicing existing debt and raising new capital is becoming increasingly costly amid rising interest rates and growing skepticism toward AI companies.
These days, companies have to get creative with their financing strategies. Both CoreWeave and Nebius have stated that they are actively seeking advance payments from customers for future computing capacity deliveries.
Given current yields, CoreWeave will not issue unsecured bonds—“and there’s no need to,” said its CEO, Michael Intrator. According to him, a significant portion of capital expenditures—which could total up to $39 billion this year—is financed by customer prepayments and deposits. In the current quarter, these inflows will amount to about $9 billion.
At the same time, CoreWeave hopes to secure a loan in the coming weeks to purchase Nvidia chips and other computing equipment needed to fulfill a contract with an unnamed investment-grade company. This loan is secured by the chips, and the interest rate is expected to be 7–7.5% per annum. This is less than half the yield on CoreWeave’s unsecured bonds.
But even now, the company’s interest payments significantly exceed its adjusted operating profit—in other words, its revenue isn’t enough to service its growing debt, as Gil Luria, an analyst at D.A. Davidson, pointed out in an interview with Bloomberg: “This is a business with structural problems, which is precisely why it is under such intense pressure.”
Brian Mulberry, chief market strategist at Zacks Investment Management, is optimistic: if CoreWeave can keep this up for several consecutive quarters, he believes investors’ concerns will subside.
Nebius is also handling advance payments from customers, as the lending market has temporarily shut down, Nebius CEO Arkady Volozh stated earlier. The key question for this company is whether it will be able to meet its goal of installing 0.8–1 GW of connected capacity by the end of the year, Bank of America analysts noted in a report in late October. It currently has 675 MW of connected capacity and 525 MW of operational capacity, which “represents significant growth from the 170 MW of operational capacity at the beginning of 2026.”
If prices are at their lowest, is it time to buy Neoclaud stocks?
The yield on CoreWeave's unsecured bonds rose from 9.6% to 15%, and they are trading at a spread of about 1,000 basis points—a level typical for CCC-rated bonds, whereas CoreWeave is rated BB-, Trisi notes.
In other words, according to him, the market suggests one of two things: either the company’s rating should be lower, or a significant amount of bad news has already been factored into the price—"trampled into the very dregs of the dregs"—and the bonds are poised to rise in price (while yields fall).
The latest spike in yields (leading up to the 2022 peak) coincided with the sell-off in tech stocks and the crisis at Nvidia, Trisi adds.
The company announced the resignation of its founder and CEO, Jensen Huang, following reports of his extramarital affairs, including one with a woman whom U.S. intelligence agencies suspect of working for Chinese intelligence. Nvidia’s stock fell 4.3% on Thursday, November 12, and has dropped 17% since last Thursday.
“When the influence and wisdom of one of the most powerful CEOs are called into question, all the deals he has made begin to seem questionable as well. This is one of the reasons why the stocks of companies like CoreWeave have come under such pressure in recent days,” says Trisi.
Other factors are also influencing the market. The Democrats, who regained a majority in Congress following the November 3 election, have promised to halt the construction of data centers, protests against which have spread across many U.S. states.
But if you think politicians are cynics and these talks will amount to nothing more than talk, then perhaps it's time to buy shares in Neocloud, Trisi believes.
There is another possibility, he argues: politicians will reach an agreement with the companies whereby the companies will take responsibility for supplying the data centers with electricity and water for cooling, and will comply with environmental standards. In this case, the projects will continue, but the companies’ costs may rise.
In any case, despite the lack of AI infrastructure in the medium and long term, macroeconomic challenges, high capital expenditures, and political uncertainty continue to negatively impact the valuation of companies that specialize exclusively in data centers, according to a report by CCB International.
A sharp drop in stock prices makes naked calls attractive investments, but the numerous risks involved and the fact that they serve as an indicator of investor anxiety point to high volatility, the WSJ notes.
This article was AI-translated and verified by a human editor
