The US-listed neocloud sector experienced a significant downturn and market panic last Wednesday night on Wall Street. Concerns are mounting over the financial stability of these data centre companies, highlighted by the recent struggles of CoreWeave. CoreWeave is a neocloud provider that specialises in high-performance computing services, particularly for artificial intelligence workloads. Its five-year debt yield, issued at 9.75 per cent in April, has since leapt to 15 per cent, signalling investor distress. Technology investor Chamath Palihapitiya has been vocal about the large amounts of debt used by neoclouds, suggesting systemic risk for the private credit sector due to mismatches, such as borrowing for five years against customer contracts averaging just three.
The market’s anxieties were amplified when Elon Musk responded to Palihapitiya’s social media post with a single word: “Yikes.” This quickly triggered a cascade of heavy losses. CoreWeave shares plunged over 15 per cent in a brutal session, accumulating a 28 per cent loss since the previous Tuesday. Iren, an Australian-born bitcoin miner now operating as a neocloud, shed 12 per cent on the day and is down 37 per cent since late last month. Fellow neocloud Nebius also slumped 10 per cent, contributing to a 25 per cent loss within a week. The broader artificial intelligence trade felt the ripple, with the Philadelphia Semiconductor Index falling 4.3 per cent, marking a more than 10 per cent drop in five days.
Adding to the sector’s woes, IT research house Gartner released a report deeming the neocloud economic model fragile. Gartner predicts that despite an anticipated US$7 trillion in spending from 2026-2030, revenue will cap at about US$3.6 trillion, forcing over 80 per cent of providers to cease independent operations by 2030 due to cost pressures and lack of differentiation. CoreWeave CEO Mike Intrator, in an internal memo, dismissed the market’s reaction as irrational, yet acknowledged factors like failed IPOs were impacting the narrative. This micro-level sector challenge is set against a challenging macro backdrop, with US inflation rising to 3.7 per cent, sparking fears of further Federal Reserve interest rate hikes and increasing the global cost of capital.
