Musk's warning hits neocloud stocks as debt concerns mount

Oct 26 : Shares of neocloud companies declined in premarket trading on Monday after Elon Musk said the sector could face consolidation and failures, adding to concerns over a widening gap between AI infrastructure investment and revenue generation.

CoreWeave, which has become a poster child for mounting concerns over heavy AI spending, led the declines with a 4.5 per cent drop, while Nebius Group fell 3.4 per cent and IREN dropped 3.3 per cent.

Shares of Applied Digital and TeraWulf shed over 2 per cent each, while Core Scientific lost 1.7 per cent.

In a social media post on Sunday, Musk said that neocloud companies would face significant consolidation and failures, adding that SpaceX would not buy any neocloud companies.

"200+ neoclouds are going to see guppy-level death and consolidation. Some will make it through, but not many," he said.

CoreWeave and Nebius were not immediately available for comment.

Musk was not alone in flagging the risks to the sector.

Earlier this month, research firm Gartner said CoreWeave was at the top of the 100-odd neoclouds most exposed to the increasing leverage, and added that 80 per cent of the companies could cease independent operations by 2032.

Some brokerages expect AI spending to shoot past a trillion dollars next year, adding to investor concerns about the repercussions of severe dependence on debt, at a time when AI assets face rapid depreciation and markets price in more interest rate hikes by the Federal Reserve.

"There is too much debt," said Alberto Gallo, founder of hedge fund Andromeda Capital.

"It's been spent on the assumption of infinite demand and need for AI compute, and it has concentrated credit markets into one risk, paying investors very little."

Bonds of Nebius maturing in 2034 and those of CoreWeave expiring in 2033 have hit record lows on the concerns.

CoreWeave, Nebius, Applied Digital and TeraWulf have reported quarterly losses over the past one year, while IREN has not turned a profit in the past three quarters, raising scrutiny over profitability.

Shares of CoreWeave, Nebius and IREN have fallen more than 30 per cent this month alone. Investors betting on their fall have raked in at least $6 billion in paper profits.