Neoclouds Shine

**Travis Hoium** (0:02)
Neoclouds are flying high, and Motley Fool Hidden Gems Investing starts right now.
Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Tyler Crowe and Rachel Warren. And guys, the big topic of the day is the Neoclouds, two of the biggest companies in that space. Coreweave and Nebius reported earnings in the last 24 hours, and both their stocks are flying high. They're up about 20% in early trading on Wednesday. Rachel, what did you take away from this? The numbers were pretty solid, but I don't think that was a surprise for anybody who listened to the hyperscalers, the bigger tech companies saying, hey, we need more compute and we're willing to pay for it.

**Rachel Warren** (0:39)
These are earnings that are really capturing the Neocloud paradox that we're seeing. There's massive top line growth, but we're seeing really heavy infrastructure spending that's weighing down the bottom line. So Coreweave's revenue is up 112% year over year. They're operating at a net loss, but demand is there. They're holding about $104 billion revenue backlog. That's actually excluding an extra $25 billion that Coreweave secured early in Q3. That's anchored by deals like their ongoing deal with Metta. But Coreweave paid about $640 million in quarterly net interest expenses on its debt pile in this three-month period just ended. They actually raised their full year CapEx expenditure outlook up to almost $40 billion on the top end. Going over to Nebius, we're seeing more of the same. Their revenue was up, I think it was 454 percent year over year. They're saying that 70 percent of their deals, Nebius and Q2, included upfront customer prepayments. The NeoCloud business model is somewhat evolving from this multi-month model training to higher margin usage based inference workloads. Another thing that also stuck out, Coreweave said they're signing Nvidia A100 contracts extending out into 2029
That's ensuring that a 2020 generation chip can generate returns nearly a decade after launch. Bottom line for me that I'm seeing, customers aren't just paying for the chip generation, they're paying a premium for the active, cooled, fully powdered data center capacity. This isn't a time where power grids are severely constrained. You've got companies like Nebius that are experimenting with deploying AI Cloud software directly in their clients on data centers.
This could be really key to their growth long term. Some of the funding mechanisms behind the data center build outs, which I'm sure we'll talk about in a bit, I still find a bit concerning.

**Travis Hoium** (2:28)
Yeah, Tyler, that's the interesting thing here. I will note that Coreweave's 9% 2031 debt was trading over 12% yield just a few weeks ago. That is down to just under 11%. But that's a really high interest rate when you have capital needs. That means you're either going to be selling stock or you're going to be selling debt for the foreseeable future at this point. How sustainable is this? Because the thing that I always keep going back to is, in particular, Alphabet's comment about, we're signing a bunch of these short-term deals, and these were seen as, I think, Nebius was really proud of these short-term deals because they're very high margin, but we're signing these short-term deals as a bridge to when they get their full data centers, this $200 billion that they're spending on CapEx up and running.
I don't think Alphabet or Meta or any of these companies are saying, hey, these new clubs are the long-term solution, but it's a short-term solution. How do you think about that as an investor?

**Tyler Crowe** (3:23)
It's hard to square. Part of it says, yeah, take the advantage when you can. If the market's telling you to sell short, sell short. It does sound a little bit like commodity trading where it's like if you have short-term demand, sell it on short, and if it's looking pretty weak, sell on long-term demand. I'm basically like a hedging schedule for a oil company basically like we're talking about here. On the financing side, I mean, only 11% is pretty high interest rates. Not exactly the most assuring thing. One of the other things that I found interesting in some of the deals that we were talking about here too was not only are we talking about unsecured loans at like 11% range, we're also talking about now they're looking at asset-backed, basically compute-backed loans, which are trading for, what was it, the overnight SOFR rate plus 2.5%.
That is technically like junk territory for a lot of bonds. That's the two things, the equity market loves this stuff. I mean, you can see from the results in the stock market reactions that we're seeing for these companies, the stock run-ups that we've seen recently, the equity just can't seem to get enough of this good news.