CoreWeave and Nebius stocks are still in a bear market as AI bubble fears remain. CRWV was trading at $86.65 on Tuesday, down by 53% from its all-time high. Similarly, NBIS dropped to $240, down by 20% from its highest point this year.
AI bubble concerns are rising
To a large extent, CoreWeave, Nebius, and other neocloud companies are doing well. Their revenue growth is phenomenal, while their backlog is in a strong surge. In fact, the companies are having capacity problems, with Nebius’ management believing that it can sell out next year today.
The most recent results showed that CoreWeave’s revenue jumped by 112% in the second quarter to $2.6 billion. Its backlog soared to $104 billion, making it the biggest player in the industry.
Nebius, on the other hand, said that its revenue jumped to $582 million, up by 454% from the same period last year. Its half-year revenue rose by 529% to $981 million.
Still, despite this growth, the stocks are struggling to return to their all-time highs, with their short interest remaining above 10%.
One reason for this is the rising fear that we are in an artificial intelligence bubble that may burst in the coming months or years. Some top analysts like Ray Dalio, Michael Burry, Jim Chanos, and Patrick Boyle have warned about this bubble.
A major risk for CoreWeave and Nebius is that some of their AI lab clients are not yet profitable and are burning substantial sums of money. Anthropic made a loss of over $42 billion last year, while OpenAI is losing over $12.3 billion a quarter. OpenAI has warned its investors that it will burn over $280 billion by 2030.
The two companies have committed to spending billions of dollars in the next few years. Anthropic has inked a $45 billion deal with Nscale, $35 billion with Lambda, $10 billion with Volta, and a separate one with SpaceX.
The challenge, however, is that the AI industry is getting competitive, with Meta Platforms’ Musegaining share. Also, Chinese open-weight models are seeing more demand because of their effectiveness and lower costs.
Soaring debt and potential dilution
CoreWeave and Nebius are spending substantial sums of money in their data center rollout. In its statement, CoreWeave estimated that its capital expenditure for the year will be between $35 billion and $39 billion. Nebius is also spending billions of dollars.
These firms are getting this cash from GPU financing, which are made through special purpose vehicles. They simply put their deals as collateral for the financing. There are three main risks in this model.
The main risk is if customers start cancelling the contracts as a way of managing their costs. Another one is depreciation, something that may accelerate as newer GPUs come online. This means that the firms will need to boost their depreciation, while investing in newer chip models over time.
In other words, the debt has to amortize faster than the collateral loses value, and the customer contract has to outlast the loan. New chip generations arrive every year or so, which is what makes the race hard to win.
Further, the companies are diluting their investors. Nebius sold 12.7 million shares through June, raising $2.8 billion. It has 12.3 million shares outstanding that it can sell. CoreWeave’s outstanding shares have jumped to 457 million from 317 million last year.
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