Deep Dive: CoreWeave and Nebius Are Roaring Back. Can It Last?

**Zaid Admani** (0:00)
Welcome back to The Rundown for another Weekend Deep Dive. Today, we are talking about the hottest trade on Wall Street right now, NeoCloud stocks. This week, CoreWeave stock jumped nearly 20% in a single day. Nebius stock was up over 30% in a single day. These stocks have been on an absolute tear, and this is coming just weeks after this whole sector was left for dead back in July. So in today's episode, we'll break down what NeoCloud companies actually do, their business model, why Wall Street suddenly fell back in love with these stocks, and the risks these companies face moving forward. We got a great one for you today.
Let's dive in.
Before we talk about why these stocks are ripping, I want to first explain what a NeoCloud company actually does. A NeoCloud is a cloud computing company built specifically for AI. These companies buy a ton of AI chips, mostly from NVIDIA, put these chips inside datacenters, and then rent access to that computing power to whoever needs it. The customers for these companies include AI labs, like OpenAI and Anthropic, and even existing hyperscalers, like Microsoft. And what makes these NeoClouds different from traditional cloud providers, like Amazon Web Services or Microsoft Azure or Google Cloud, is that they are built almost entirely around AI. Traditional cloud platforms were designed to handle almost every kind of computing job imaginable, think websites and databases and storage and cyber security and corporate software. But NeoClouds primarily focus on AI and other GPU-intensive workloads. And that allows these companies to offer faster access and simpler pricing and more flexible contracts than the traditional cloud giants. And the biggest reason that there's a market for these companies right now is because AI demand has exploded and there isn't enough AI chips to go around. Microsoft, Amazon, and Google are spending hundreds of billions of dollars, but they still can't build data centers fast enough to meet the demand for the AI workload. And that's why Gardner predicts that NeoClouds will capture up to 20% of the $267 billion AI cloud market by 2030 Right now, the two biggest publicly-traded NeoClouds are CoreWeave and Nebius. We're going to talk more about those two companies in a bit. But yeah, big picture. The best way to think about NeoClouds is that they are basically GPU landlords. Just like how landlords borrow money to buy a building and rent that building out to tenants, NeoClouds do the same thing. They raise or borrow billions of dollars to buy or build data centers and fill them with NVIDIA chips. And then they rent that computing power to customers like OpenAI, Microsoft and Meta. And just like with landlords, the NeoCloud business comes down to a few big questions. How much does it cost to finance? How much can you charge for rent? And will your tenants stick around long enough to pay back the investment? Right now, demand is booming, and customers are fighting for capacity, and that's why rent on AI computing power is going through the roof. So let's dive in to the earnings reports of the two biggest NeoCloud companies out there, and why investors are jumping back into the stock.
Okay, so now that we know what these companies do, why are NeoCloud stocks like CoreWeave and Nebius suddenly roaring back? The thing is, these stocks were getting absolutely crushed in July. CoreWeave was down more than 60% from its May highs because investors were worried about the debt these companies were taking on. And I think investors were also starting to wonder whether the market had overestimated how much demand there would actually be for all these AI data centers. Well, then earnings season arrived, and it showed that demand for AI is not slowing down at all. We heard that from the hyperscalers like Microsoft, Amazon, and Google, and we also heard that from the NeoClouds like CoreWeave and Nebius. CoreWeave reported revenues of $2.6 billion last quarter, which was more than double in the same quarter last year. And the company said their backlog had reached over $104 billion, and that figure doesn't even include the $25 billion in additional customer commitments the company signed after the quarter ended. So investors love what they heard from CoreWeave in the earnings report. The stock was up more than 23% after the report. And then Nebius came out and did even better. Their AI cloud revenue jumped 514%, and the value of their contracts at one during the quarter quadrupled from the previous quarter, including four agreements averaging more than $1 billion each. Nebius shares were up more than 30% following their earnings report, and this also propped up names of other Neo Cloud companies like Iron and Applied Digital. So the earnings are pointing to the same conclusion, that demand for AI is growing faster than the supply of compute. And that has been key for the growth of Neo Cloud companies, and it also gives them pricing power, which is improving their margins. CoreWeave raised some of their prices by 25% in July, and management also said that newer contracts are having margins of 5 to 10 percentage points higher compared to previous contracts. And if one of their customers needs GPUs right now, instead of say six months from now, these short-term computing rentals can command an even bigger premium. Think of it like Uber search pricing, but instead of trying to get home after a concert, it's OpenAI trying to keep up with everyone using ChatGPD. But I wouldn't say the earnings were the whole story in the rebound for these stocks. Part of the reason these stocks are rallying again is a mechanical reason. See, these stocks sold off big time in July, and one reason for that was because of a hedge fund called Situational Awareness. Now, I'm not going to get into the full Situational Awareness story, but what you need to know is that it was a highly leveraged AI hedge fund, and it was run by a 25-year-old genius Leopold Arschenbrenner. Now, this fund had borrowed a ton of money to invest in AI infrastructure names, one of them being Nebius. But Situational Awareness was forced to sell many of their stocks in July to meet margin call, which led to the massive sell-off. The hedge fund ultimately had to unload most of their portfolio to Citadel. But with Situational Awareness out of the picture, that removed some of the big selling pressure, and that's what led to the rebound in the stock of some of these AI names, including Coreweave and Nebius. In fact, Coreweave and Nebius are both up more than 70% from their July lows, which is pretty crazy. Now, the other bullish news for the Neo Clouds this week was that NVIDIA is partnering with six major financial firms, including Goldman Sachs, BlackRock, Blackstone, Apollo, KKR, and Brooksfield, to establish a $500 billion fund to go towards AI buildup. We're gonna talk more about that partnership in a bit and why it's relevant to this conversation. But yeah, for now, investors are jumping back in because demand is accelerating for AI, prices are going up, and contracts are getting bigger. But now I have to talk about some of the red flags that I saw in the earnings that the market is currently choosing to ignore. So let's talk about it. Okay, so we know from the earnings report that demand for AI is not slowing down, and that's why prices are going up. Now these Neo clouds are signing contracts faster than they can build the capacity. The problem for the Neo clouds though, is that building data centers is very expensive. If you think about all that goes into it, you need land, you need electricity, you need cooling systems, networking equipment, and you have to fill these data centers with Nvidia chips. All that costs a lot of money, and it takes time to build these things. CoreWeave says they expect to spend between $35 and $39 billion on CapEx this year. And here's the key point. They have to borrow the money to do it. See, the hyperscalers on the other hand, like Amazon, Microsoft, and Google, can fund a lot of their AI build out with cash they generate from their existing businesses. And when they do decide to borrow money, they get really good interest rates because they are some of the biggest companies in the world. The NeoCloud companies, though, don't have that luxury. So they have to pay more to borrow money. In fact, CoreWeave is paying almost five additional percentage points to borrow money compared to Amazon. And that makes a huge difference. Like for every billion dollars borrowed, that difference works out to roughly $49 million of additional annual interest payments. And if you look at CoreWeave, they have a lot of debt already. They have about $35 billion of debt on their balance sheet. And last quarter, the company spent $640 million in net interest expenses. So that means that interest expenses alone was equal to roughly one quarter of their revenue. So that's why the headline numbers from earnings can be a little misleading. Sure, CoreWeave's revenues did more than double, but their net losses actually widened to $626 million. So yeah, they're making more revenue and signing more contracts and raising prices, but they're still losing more money. And the reason for that is because their cost of financing all their growth is going up. The research firm DA Davidson did the math on this, and they calculated that CoreWeave earns roughly a 4% return on each new data center that they built. But their cost of capital has climbed to as high as 9%. So in other words, CoreWeave may be borrowing money at 9% to build something that earns them 4% today. Now, to be fair, CoreWeave is raising prices because of all the demand, so the return on their data center investments is going to improve over time. But as of right now, they're still not close to showing a profit. Nebius is in a bit better financial position than CoreWeave. They finished the quarter with approximately $8.5 billion of debt, and they have roughly $8 billion in cash. Now, Nebius also recorded about $119 million in quarterly interest expenses, which is still huge, but that's nowhere near CoreWeave's $640 million. Nebius says they plan to spend between $20 and $25 billion on capital expenditure this year to build out their data centers. Now, Nebius' management did say they expect their customers to prepay to fund roughly 60% of that spending. The rest of it, though, will have to come from debt or other options like issuing more shares. In fact, last quarter, Nebius raised approximately $2.9 billion by issuing their stock. By doing that, they avoid having to pay interest, but issuing shares does dilute existing shareholders. So the company gets more cash, but every existing shareholder owns a slightly smaller percentage of the business. And typically, that's not what shareholders want to do. So yeah, one of the biggest hurdles these neoclouds face today is how much it costs to borrow money to fund their AI buildout. And that brings me to NVIDIA's new Wall Street partnership. As I said earlier, NVIDIA is working with six major financial firms to help direct as much as $500 billion into AI infrastructure over time. Essentially, NVIDIA wants these Wall Street banks to lend money to companies like CoreWeave and Nebius, so CoreWeave and Nebius can keep buying NVIDIA's chips. NVIDIA has even offered to backstop some of these loans so they can be offered at an attractive rate. So for CoreWeave and Nebius, this is great news because it can give them access to financing at better interest rates. I think the real question that investors will have to ask about these neoclouds is that will the new data centers eventually earn more than they cost to build and finance today because as of right now, these companies are taking on billions of dollars in debt to buy equipment that could potentially lose value over time. New AI chips are coming out on a yearly basis. So that means that these neocloud companies have to constantly be spending money to keep their data centers stacked with cutting edge AI chips. So if you really think about it, these companies are borrowing enormous amounts of money to buy equipment that could depreciate quickly. And then at the same time, the biggest customers for these neocloud companies are the hyperscalers that are building their own data centers and chips and computing capacity. Companies like Microsoft and Meta need CoreWeave and Nebius today because they can't build their own data centers fast enough, but once they have enough computing power, then what? So I think that's the long-term question overhanging the entire industry.