Microsoft Just Piled Onto the Bad News for CoreWeave, Oracle, and Nebius

Microsoft has added to the poor outlook for CoreWeave, Nebius, and Oracle. Shares of CoreWeave and Nebius plummeted over 35% each since October, while Oracle fell more than 12%. Investors are increasingly skeptical of neoclouds due to several factors. Microsoft is reviewing its contracts with these companies, planning to reduce the number of vendors it works with.

Bloomberg reports that Microsoft has not renewed an Oracle cloud deal and intends to focus on its own data centers. Microsoft and CoreWeave made up 36% of the former's second-quarter revenue. Microsoft also signed a 2031, $17.4 billion compute deal with Nebius, which accounts for a significant portion of its $3.35 billion expected revenue.

Microsoft is transitioning to its custom AI accelerator chip, Maia 300, which is more cost-effective than GPU systems. This shift could lead to a reduction in demand for third-party compute. Alphabet has also indicated that it views its contracts with neoclouds as a short-term solution. While near-term demand for GPUs remains strong, the compute supply shortage may not last indefinitely.

Neoclouds heavily rely on outside financing, and securing loans depends on contracts with investment-grade customers like Microsoft and Alphabet. However, investors are becoming more cautious about lending capital to neocloud companies, demanding higher risk premiums. The yield on some CoreWeave bonds has reached 16%, while Microsoft is issuing debt at rates between 4.85% and 6.35%.

The limited capital available and the significant debt issuance by hyperscalers make it challenging for investors to find adequate compensation for the risks associated with neocloud stocks.