Top neocloud companies have dropped sharply this year, even as their revenue growth continues. CoreWeave, the pioneer of the industry, slipped to $87, down sharply from its all-time high of $186. This retreat has pushed its market capitalization from over $88 billion to $49 billion today.
Nebius stock slipped to $224 from the year-to-date high of $300. IREN, a Bitcoin miner pivoting to the AI data center industry, has also slipped to $43 from the year-to-date high of $77. All these companies have received large investments from Nvidia.
CoreWeave, IREN, and Nebius are seeing strong demand
The most recent financial results showed that these companies are firing on all cylinders as demand for their GPUs continue rising. CoreWeave has taken a lead role, with its revenue backlog jumping to over $104 billion. This backlog is coming from its partnership with companies like Microsoft, Anthropic, and OpenAI. It has also become a top supplier to Jane Street.
The results showed that CoreWeave’s revenue jumped by 112% to $2.6 billion, with its adjusted EBITDA moving to $1.5 billion. Analysts expect that its annual revenue will jump to $12.9 billion this year followed by $26.4 billion next year.
Nebius also released strong numbers, with its revenue rising by over 400% during the quarter. This growth is coming from its large deals from companies like Microsoft and Meta Platforms, with analysts expecting its revenue to $3.34 billion this year and $12 billion next year.IREN, on the other hand, is expected to make $2.8 billion this year and $7.2 billion next year.
Growth is coming at a cost
The main reason why these stocks are struggling is that this revenue growth is coming at a cost. For one, the AI boom has pushed the cost of GPUs, memory, servers, and optical systems much higher this year. As a result, they are having to spend more money than initially expected.
A good example of this is CoreWeave, which expects to spend between $35 billion and $39 billion in capex this year. Before that, its goal was to spend between $30 billion and $35 billion in capex.
The companies are now having to raise capital in debt and equity. Nebius raised over $2 billion by selling shares in the second quarter. It also has about 12 million shares that it can sell to fund its AI rollout.
They have also boosted their debt substantially. CoreWeave has accumulated over $27 billion in debt in the past few months. Nebius has been much better since its business started as a spin off of Yandex, the top Russian search engine company.
These metrics explains why these companies have received a substantial short interest. Nebius hs a short interest of 23%, while CoreWeave and IREN have a short interest of 12.8% and 24%, respectively. This means that investors expect the stocks to remain under pressure for longer.
The stocks have also slipped as competition in the neocloud rises. SpaceX recently received a large order from a company that will pay it $1.1 billion a month starting from December. Meta Platforms and Microsoft are also starting to lease their extra space.
IREN, Nebius, and CoreWeave stocks have also slipped because of the ongoing fears that the AI bubble will burst. Also, there are calls to slow the rollouts of more advanced AI models.
In the future, however, these companies will do well as their capital investment phase starts to wind up. This will lead them to start being free cash flow machines.
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