Neocloud Stocks Tumble as Microsoft's Capex Misses Expectations, Signaling Capacity Delays

Shares of key neocloud companies, including CoreWeave, Nebius, and IREN, experienced a significant drop in extended trading. This downturn follows Microsoft's announcement of capital expenditures that fell below analyst expectations, suggesting potential delays in the delivery of crucial data center capacity from infrastructure partners.

Key Points

• CoreWeave, Nebius, and IREN saw declines as Microsoft's lower-than-expected capex indicates infrastructure partners are taking longer to provide capacity.
• The neocloud sector has faced recent volatility due to concerns that rising interest rates could make expansion projects prohibitively expensive.
• Despite recent headwinds, the group had shown signs of recovery this week, buoyed by positive analyst commentary.

Microsoft's Capex and its Impact on Neoclouds

Microsoft reported capital expenditures and finance leases of $45.2 billion for the quarter, a 30% increase year-over-year but below the $50.7 billion anticipated by analysts. This figure is particularly significant as Microsoft heavily relies on neoclouds to power its rapidly expanding artificial intelligence infrastructure. The company has secured substantial deals with neocloud providers, including a nearly $20 billion agreement with Nebius for compute services through the 2030s and is a major client for CoreWeave.

The neocloud sector has been navigating a challenging market landscape recently. Concerns about the increasing cost of future debt raises and a potential withdrawal of lenders have added to the volatility. This sentiment was further amplified by predictions from industry figures like Elon Musk, CEO of SpaceX, who foresees a significant consolidation in the neocloud market, with over 200 companies potentially collapsing due to restricted access to debt financing for those without substantial non-AI data center revenue. Analyst firm Gartner has also projected that by 2030, 80% of neocloud companies might be acquired or cease operations entirely.

Microsoft attributed the disparity between revenue growth and capital expenditures to timing differences in payments and a lower proportion of finance leases. Despite this, CoreWeave and Nebius shares fell approximately 5% following the earnings report, while IREN saw a dip of about 3%.

Adding to the sector's pressure, Alphabet, Google's parent company, also reported capital expenditures of $51.36 billion, falling short of the $55.09 billion estimate.

Market Reactions and Analyst Outlook

The neoclouds had experienced a modest recovery earlier in the week, with CoreWeave leading the gains, rising 18% over the preceding three trading days. Analysts at Wolfe Research had expressed optimism, projecting a rebound for CoreWeave stock into the mid-$70s. However, the recent news has cast a shadow over these positive sentiments.

Earlier on Wednesday, Oracle had issued a robust long-term revenue forecast, signaling a return to free cash flow positivity in the latter half of the next fiscal year. Oracle's stock initially surged 11% before retracting 3% after Microsoft's report, highlighting the market's sensitivity to tech infrastructure news.

Reported by CNBC's Jordan Novet.