Oct 26 (Reuters) - Shares of neocloud companies declined on Monday after SpaceX CEO 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, declined 1.6%, while Nebius Group fell 4% and IREN lost 1.5%.
Shares of Applied Digital shed 2%.
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, calling it "pointless".
"200+ neoclouds are going to see guppy-level death and consolidation. Some will make it through, but not many," he said.
"Musk is correct. You're going to need another source of revenue and profits in order to finance these projects moving forward. The cost of capital is too high to make the returns attractive," said Thomas Hayes, chairman at Great Hill Capital in New York.
In an email to Reuters, a CoreWeave spokesperson said that the company continues to see opportunities to finance its growth, underscored by qualities such as "differentiated technology".
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% 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.
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% this month alone. Investors betting on their fall have raked in at least $6 billion in paper profits.
(Reporting by Johann M Cherian and Purvi Agarwal in Bengaluru and Vidya Ranganathan in London; Editing by Shinjini Ganguli)
