Neocloud firms grow fast by renting AI chips, and risks are rising

In short: Smaller “neocloud” companies that rent AI computing power are booming, but their business model can make problems spread quickly if the market turns.

What's going on

So-called neoclouds are younger companies that rent out the servers and chips used to run AI systems. Think of them like a tool rental shop for AI, where the “tools” are powerful computers.

The Financial Times points to companies such as CoreWeave and Nscale. Nscale recently signed a six-year rental deal with Anthropic that the FT says is worth about $45bn, and it may go public as soon as next month. Nscale was valued at $14.6bn in its last fundraising round, and it has high-profile board members including Sheryl Sandberg and Nick Clegg.

Investors have been rewarding similar firms. CoreWeave shares have more than doubled since listing last year, and Nebius is up about threefold over the past year, according to the FT. Demand for data centres (large buildings full of computers) is outpacing supply, which helps these companies sell long-term capacity.

What to watch

The FT warns that the risks are tied together in ways that can magnify losses. Some neoclouds rent facilities themselves and rely on chipmakers like Nvidia not only as suppliers, but also as investors and guarantors. That can encourage too much building, similar to how vendor-backed financing contributed to past tech booms and busts.

Another risk is long contracts with customers, sometimes running 10 years or more, while the neocloud’s own costs can change. Chips also age quickly, like how an old phone becomes less useful over time. Some contracts may be easier to exit than people assume, the FT notes, citing a separate deal that reportedly allowed termination with 90 days’ notice.

Source: Financial Times