Why are CoreWeave and Nebius stocks rising 4% on Tuesday?

Neocloud stocks CoreWeave CRWV and Nebius rose about 4% in premarket trading on Tuesday as investors likely bought the dip following a sharp selloff driven by concerns over borrowing costs and the sustainability of debt-funded artificial intelligence infrastructure spending.

Meanwhile, French news outlet L’Informé reported on Monday that Nebius had raised 250 million euros (about $279.3 million) for its data centre project near Lille in northern France.

Both stocks have fallen about 7% over the previous five trading sessions and roughly 35% over the past month, reflecting growing anxiety about whether neocloud providers can finance their expansion as credit conditions tighten.

Neocloud companies rent computing capacity, including access to graphics processing units (GPUs), to businesses developing and deploying AI models.

Demand for computing power has surged, but the industry requires substantial upfront investment in chips, servers and data centres, leaving many providers dependent on external financing.

Musk warning adds to financing concerns

The stocks came under renewed pressure on Monday after Elon Musk warned that more than 200 companies in the sector could face failures and consolidation as access to capital tightens.

“As of the past few weeks, debt markets have almost entirely shut off access to money for any company that doesn’t have substantial revenue independent of AI data centers,” Musk, CEO of SpaceX and Tesla, said in a post on X on Sunday.

“That means the 200+ neoclouds are going to see guppy-level death and consolidation. Some will make it through, but not many,” he added.

CoreWeave nevertheless closed higher on Monday, before extending gains in premarket trading on Tuesday.

Earlier this month, research firm Gartner identified CoreWeave as among the neocloud providers most exposed to rising leverage.

It also warned that 80% of the roughly 100 neocloud companies it assessed could cease operating independently by 2032.

The risks are mounting as some brokerages expect AI spending to exceed $1 trillion next year.

Investors are increasingly questioning whether the returns from AI infrastructure will justify the borrowing required to build it, particularly as computing equipment depreciates rapidly and markets anticipate further Federal Reserve rate hikes.

CoreWeave's $52 billion obligations under scrutiny

CoreWeave has become a focal point of the debate because of the scale of its financing needs.

The company raised more than $35 billion this year through a combination of chip-backed loans, high-yield bonds, convertible bonds and share sales.

Its debt and lease obligations totalled approximately $52 billion at the end of June.

However, the company also has substantial contracted demand.

Its revenue backlog reached about $104 billion at the end of June, and it secured more than $25 billion in additional customer commitments early in the third quarter.

The challenge is converting those commitments into revenue and cash flow.

Doing so requires further investment in data centres and GPUs, potentially increasing financing needs before the associated revenue is fully realised.

That leaves investors weighing the strength of customer demand against the cost of delivering the computing capacity that has been promised.

Why CoreWeave and Nebius are likely to survive consolidation

Even so, many experts have suggested that despite the threat facing neoclouds, CoreWeave, Nebius and Iren are most likely to survive.

Milk Road AI analyst Melvin agreed with Musk's broader assessment that most neocloud companies would not survive, but said Nebius, CoreWeave and Iren would make it through the consolidation.

He said unlike companies that are building data centers and hoping customers eventually show up, "Nebius already has more than $40 billion in long-term customer commitments, relationships with investment-grade customers like Microsoft and Meta, and access to substantial amounts of contracted power."

He also said that despite CoreWeave's debt and "aggressive spending", the company reported approximately $104 billion in revenue backlog at the end of Q2, with another $25 billion in net customer commitments added early in Q3.

It also has established relationships with some of the largest AI companies in the world and already operates infrastructure at a scale most competitors cannot come close to matching, he said.

Nebius has also sought to distinguish its funding model from that of providers facing greater pressure over debt.

Chief Revenue Officer Marc Boroditsky told CNBC at Nvidia's GTC Berlin conference last Wednesday that the company was less exposed to market pressures affecting other providers because it did not carry the same kind of debt as CoreWeave.

He pointed to equity raises, convertible offerings and upfront customer payments as Nebius's principal funding sources.

Yardeni sees cooling rather than collapse

Veteran Wall Street investor Ed Yardeni, president of Yardeni Research, argued on CNBC's Power Lunch on Monday that tighter credit conditions could restrain excessive AI spending without causing the broader investment boom to collapse.

"I think air is coming out of the bubble without the bubble bursting, which is the best solution to all these concerns," Yardeni said, responding to questions about stretched AI valuations and financing risks.

He said lenders were becoming more selective about which AI companies they financed, rather than providing capital indiscriminately.

"The bond market is going to regulate the availability of capital to the AI trade," he said, adding that credit investors were increasingly scrutinising borrowers, sometimes moving faster than rating agencies.

Yardeni acknowledged that intense competition could lead to failures but argued that companies across the AI ecosystem might support struggling operators.

"There will be some failures here, but this is an ecosystem, sort of a band of brothers and sisters where they’re all going to bail each other out," he said.

He suggested that Anthropic could use proceeds from an anticipated initial public offering to assist distressed neoclouds, although no such commitment has been announced.

The contrasting outlooks leave neocloud investors balancing strong demand for AI computing against rising financing risks.

The sector's next phase may depend less on securing customers and more on whether providers can fund their infrastructure and convert contracted demand into sustainable cash flow.