AI Data Center Firms Face Debt, Market Worry

Companies that lease computing power to major AI developers are facing scrutiny from investors and analysts, who question whether their heavy borrowing is sustainable. These firms, known as neoclouds, operate large facilities filled with expensive computer chips for clients such as Anthropic, OpenAI, and Meta.

The sector carries significant financial obligations. Analyst Cory Johnson of The Quiet Period said lenders often weigh the credit of major customers like Microsoft or Meta over the neocloud firms themselves when issuing loans. He stated this dynamic explains how CoreWeave accumulated $35.1 billion in debt. Johnson noted that debt is common in the industry because hardware costs must be paid upfront.

Investors have grown cautious. CoreWeave stock lost a quarter of its value over the past month. Shares in Nebius, IREN, and Applied Digital declined by similar margins during the same period. Debt investors are also demanding higher returns from several firms in the sector. Treasury Secretary Scott Bessent addressed these concerns on CNBC last Thursday, calling these firms "a small component of the overall ecosystem."

Predictions about the industry's longevity vary. Analysts at Gartner estimate that by 2030, 80% of neocloud firms will cease independent operations. Forrester experts expect at least three firms to be acquired soon as finances weaken. Charlie Dai, a Forrester vice president, stated that the business model carries "greater financial risk" if Big Tech customers adjust their spending plans. When Microsoft and Google forecast lower AI spending than analysts expected last week, several neocloud stocks dropped.

Many of these companies grew out of cryptocurrency mining. CoreWeave was founded in 2017 to mine Ethereum, while IREN, Core Scientific, and Applied Digital also started in that sector. Their hardware positioned them to meet the surge in computing demand following OpenAI's ChatGPT release in 2022. Nebius followed a different path; it operated as Yandex NV, part of Russia's largest search engine, before separating and renaming in 2024.

Borrowing costs remain a concern for the sector. In a social media post, Elon Musk suggested more than 200 neoclouds could face "guppy-level death and consolidation," adding, "Some will make it through, but not many." Analysts at Yorkville Ives report that demand for computing power still exceeds supply. Cory Johnson stated, "There's reason to worry."