These firms you've never heard of are feeding fears the AI bubble could burst
The amount of debt held by data centres is measured in the tens of billions of pounds.
These firms you've never heard of are feeding fears the AI bubble could burst
A once-obscure part of the AI ecosystem is now in the spotlight, and not all investors are pleased with what they’re seeing.
Names such as CoreWeave and Nebius are well known among tech circles in San Francisco and Silicon Valley.
These data centre businesses, called neocloud firms, operate vast warehouses filled with costly computers that they rent out to major AI developers including Anthropic, OpenAI and Meta.
They are now at the centre of one of Silicon Valley’s most intense arguments.
Many are questioning whether neocloud firms are financially healthy, and what their recent setbacks say about the broader AI economy.
Analysts at Gartner forecast that by 2030, 80% of neocloud firms will "cease independent operations", while Forrester experts expect at least three of them to be bought soon "as finances get shaky".
On Thursday, Treasury Secretary Scott Bessent sought to play down the latest worries about neocloud firms, describing them on CNBC as " a small component of the overall ecosystem
, external
".
Neocloud firms often fund themselves by signing long-term lease agreements with major tech customers that need rapid access to computing power.
They can then borrow against those contracts — along with the AI chips they buy — as collateral, said Cory Johnson, an analyst at the IPO research firm "The Quiet Period".
He said debt is widespread across neocloud firms because the hardware must be paid for in advance.
Consider the industry leader, CoreWeave. It is only a fraction of the size of some of the Big Tech companies it supplies.
But Johnson thinks lenders sometimes focus more on the creditworthiness of CoreWeave’s customers, such as Microsoft or Meta, than on CoreWeave itself when extending loans.
"This helps explain how CoreWeave accumulated $35.1bn (£26.3bn) in debt," he said.
Some nervous investors seem to be reconsidering.
CoreWeave shares have fallen by a quarter over the past month, and it is not the only one.
Shares in other neocloud firms such as Nebius, IREN and Applied Digital have each dropped by about that much, if not more, over the same period.
Debt investors also appear unsettled, and are demanding higher returns from several companies in the sector.
CoreWeave chief executive Mike Intrator has said the market is behaving "irrationally" and has voiced confidence in the company’s business model. Some of the world’s most important companies are lining up for CoreWeave’s infrastructure and other AI services.
Several neocloud firms trace their origins to the volatile crypto mining industry, made up of companies that create cryptocurrencies such as Bitcoin.
Crypto miners use some of the same physical infrastructure that is used to build AI.
CoreWeave was founded in 2017 with a focus on mining Ethereum.
IREN, Core Scientific and Applied Digital also began in crypto mining.
That infrastructure left them well placed when AI took off in 2022 with the launch of OpenAI’s ChatGPT.
Nebius is an exception: it was known as Yandex NV when it was part of Russia’s version of Google, before splitting off and changing its name in 2024.
Now, the fortunes of these firms depend on the prospects of major AI developers and hyperscalers — even larger data centre operators that neocloud firms often count among their key customers.
"There is just an enormous amount of spending getting injected into the system," said Melissa Otto, head of Visible Alpha Research at S&P Global. "It's an arms race."
And neoclouds have benefited.
But the downside of their model is "greater financial risk" when conditions change, said Charlie Dai, VP and principal analyst at Forrester.
That includes any changes their Big Tech customers may make to spending plans.
This past week, when Microsoft and Google projected less AI spending than Wall Street analysts had expected, shares in several neocloud firms fell sharply.
A great deal also depends on Anthropic and OpenAI, both of which are expected to begin selling shares to the public in the coming months.
If AI turns out to be a bubble — and then bursts — neocloud firms "are definitely going to face collateral damage," said Bradley Tusk of Tusk Ventures.
The future of the neoclouds also depends on their ability to keep borrowing, which becomes more costly as interest rates rise.
In a recent social media post, Elon Musk suggested this could cause more than 200 neoclouds to "see guppy-level death and consolidation", with the smallest firms most exposed.
"Some will make it through, but not many," he added.
For now, analysts at Yorkville Ives said demand for computing power still outstrips supply, adding that neoclouds are filling an important gap that larger data centre companies cannot fill.
But to some, the sector’s recent instability is worrying.
Microsoft recently cancelled a deal with a British neocloud company called Nscale because of power supply problems that could continue through 2030.
Australia’s Firmus has just shelved plans to sell shares to the public.
These developments come amid a public backlash against data centres and questions about how much AI can really improve worker productivity.
"There's reason to worry," said Johnson.