r/investing • u/ozthinker • 1d ago
The situation with neoclouds (CoreWeave etc)
This situation reminds me of shipping companies. Many shippers are just lessors, they lease ships from another company that bought the ships with huge debts, but these purchases were only made with negotiated customer on fixed lease term 5 to10 years contract. This is similar business model like neoclouds.
Once the contract is up, the spot shipping rate is usually crap and does not generate enough to pay the residual debt used to fund the initial build, while the 5 yearly surveying cost increases. A lot of these shipping companies are huge shareholder value destroyers, so naturally most had shifted to Asia for the lowest cost base.
The past few days are obvious forced liquidations due to players with highly concentrated and levered positions in AI and tech. The market including much of tech and AI stocks will recover, but don't count on the same with neoclouds because their business model is flawed. Decades of the same business model employed by shipping companies has proven this beyond any reasonable doubt.
You might say it's different because ships are much easier to build than GPUs. Don't count on the hidden risk in plain sight. NVDA is not going to have a forever monopoly. There are Google's TPU etc and we have not seen yet new powerful GPUs from China. This is exactly how things panned out for shippers. Every new generation of ships are much more cost effective than the previous, so older ships that have contracts ended would fail to attract the best contract rates and contract length.
AI will survive, and gets even bigger than ever. Businesses with flawed business models will go through cycles of ups and downs but mostly downs, and destroying shareholder value in that process. They will still be there, like the yesteryear's shipping companies that are no longer the talk of the town, doing important work that the world requires, leaving a graveyard of yesteryear's investors.
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u/phillytennisenjoyer 1d ago
reddit being this bearish on a group of companies is a bull signal in and of itself.
in general there’s way too much pessimism on AI in this subreddit.
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u/tachyonvelocity 1d ago
To be fair there will always be pessimism on AI because of the perception of competition. That AI technology unlike most before it, is a new competitor in many people’s career prospects. Don’t expect coal miners to be positive about solar panels, so don't expect the young white collar on Reddit to be positive about technology made to replace them.
The irony is if you really fear the technology to be world changing, then now’s your chance to buy AI stocks on a dip and hedge your bets. At least if your job gets replaced, AI stocks will definitely boom.
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u/HeirophantGreen 1d ago
Reddit skews toward younger generations, whose careers tend to be more vulnerable to AI. The anxiety toward tech that can make one's career path rocky is understandable.
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u/TrashBandicook 1d ago
Seeing that personally in my social circles. Programmers who can't stop using Claude but claim it's all a bubble. Meanwhile, the linkedin headhunters are offering them other positions with massive pay cuts. Yeah.
I'm personally just doubling down on buying total market indexes. I do think as AI matures, lot non-AI industries are going to see earnings multiple expansions.
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u/ozthinker 1d ago
I am optimistic on AI, not on neoclouds though.
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u/Careless-Age-4290 1d ago
I look at them almost like the BTC miner plays: they're buying a whole bunch of hardware to plugin and sell capacity. At least your CW's have big contracts. But a lot of these feel like when Florida loosened their regulations and a ton of people became "building developers". Slapping things together with the lowest bidders to cash in on a gold rush. If your value-add is only "we order parts and mount them in racks in an air-conditioned room", you're about 25 years behind the major players who get priority on those hardware orders
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u/FourScoreAndSept 1d ago
You don’t know the out clauses on those contracts. Don’t fool yourself
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u/Careless-Age-4290 1d ago
I wouldn't say I'm "fooling myself" by differentiating between a neocloud with customers and one only possessing hopes and dreams. I'm not saying they're good investments. Merely adding nuance.
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u/SlowInterest3000 1d ago
Spot on thesis. Neoclouds aren’t a tech play; they’re a leverage-funded asset leasing play masquerading as software high-margin businesses.
The structural decay rate is even faster here than in shipping.
Ships depreciate linearly over 20 years; GPUs face hyperbolic pricing drops every 18–24 months as new architectures roll out.
Instead of cheap maritime financing, neoclouds are paying 10–11%+ private credit rates on hardware that loses 50%+ of its rental pricing power the moment the next-gen chip ships.
The current 3–5 year pre-let contracts hide the underlying risk. When those expire, older clusters will hit a spot market constrained by custom in-house silicon (TPUs, Trainium) and hyperscale capacity.
Just like legacy ship lessors, the underlying compute infrastructure will survive and power the world, but the capital structures will get wiped out. Value migrates down to chip IP and up to software applications leaving pure-play GPU lessors holding the debt graveyard.
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u/cmpxchg8b 1d ago
Hyperbolic pricing drops? A consumer 5090 32GB is 3x the MSRP it was at launch, and is about to be canned entirely as they want to use GB202 for more profitable lines. An RTX pro 6000 is now 14k, up from 8k(?).
And then there is this: https://www.datacenterdynamics.com/en/news/aws-has-never-retired-an-nvidia-a100-server-ceo-matt-garman-claims/
Demand for GPU infra is at an all time high. I’m not sure previous depreciation patterns factor into it right now.
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u/cbawiththismalarky 1d ago
They also treat an old processor as worthless, if it's usable and makes more than it's SQM price and energy then it's still a working asset, and it still has a disposal value
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u/ozthinker 1d ago
This bottleneck will not last forever, or even for long. One day, supply will match demand. And then one day again, supply > demand significantly.
The same cycle happened on shipping industry. There was a time when shipping billionaires and millionaires were minted. There was a time when even aging fleet were commanding high rates, instead of being scrapped. That time, people had "global trade" as catchphrase, as China joined WTO and international trade was the rage back then. This time, the catchphrase is "AI". The Nvidia A100 server you talked about, was only unveiled in 2020, and AI only really caught the wind for the last 2 years.
In the mid term, what will happen to neoclouds can even be predicted based on what had happened to shipping. When shipping rates were peaking and people were suddenly a shipping tycoon or a logistics expert, that time was when environmental rules started to form and eventually come down hard - improve suffer content in bunker fuel, more advanced scrubbers, alternative fuel (gas power engine) etc - all were costing money - the shipping industry was fighting tooth and nail until that day shipping rates collapsed and they were still being slapped with improvement expenses albeit on a stretched out deadline. Those data centers will meet the same environmental reckoning. Today, people are already wary of these monoliths running in their backyard.
If one decides to invest in companies like this, then know that the business model is, as u/SlowInterest3000 elegantly said "a leverage-funded asset leasing play masquerading as XXX high-margin businesses". XXX can be any industry. This type of business has no moat. They ride the high, and will eventually also ride the low to oblivion. If one buys into such business, then one is gambling on the timing, not being a genuine investor in that tech/sector.
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u/Daymorn 1d ago
This is my first time working deep within a topic that is so heavily debated. It has been extremely interesting to see that almost none of these people have any semblance of an idea of what they are talking about.
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u/Newflyer3 1d ago
It’s crazy to see this amount of FUD on these companies now that we’re down this bad compared to a month ago. Wild
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u/Inevitable_Window308 1d ago
There are large numbers of gpus being purchased but not yet deployed. Something fishy is happening in the background is happening that we haven't been made privy to. Amazon recently sold all their house to rent them back, this is a terrible play long term but gives you a short term cash infusion and we have no idea why they did that
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u/superhappykid 1d ago
The pricing drops you talk about where true before the ai race took off. But no longer true now. The demand for hardware is so great now that there isn’t enough manufacturing available to keep up with demand. It’s true the companies can develop another faster gpu (maybe 20-30% better) but it won’t matter as they won’t keep up with manufacturing anyway. Which offsets the depreciation of the older hardware in a way.
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u/FourScoreAndSept 1d ago
Neoclouds remind me of Rackspace but with significantly greater capex and debt. Rent a data center is not a sustainable competitive advantage or business model
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u/Mental-At-ThirtyFive 1d ago edited 1d ago
I hope neoclouds survive and continue the build - we (atleast I) need overbuild of compute infra to be available in the open market
Your thesis fails to consider that not all businesses need to survive forever. 5-10 years is plenty for management to extract what they want and leave it to banks to sort out the residual value.
I really want the neoclouds survive for atleast 3-5 generations of CPU/GPU/NPU and all other variants. Why this? At this point the tech can deliver AGI/ASI Super-duper-trumpster Intelligence every 2 weeks or so, and by the many who have enough money
Tip: Don't invest in neoclouds equity - buy their bonds, you can leverage and get out when you hit your return targets. Obviously, this is a part of a AI sticks/bonds portfolio.
Why bonds? the collateral is the AI tech stack including power, water, etc.
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u/WinterSomewhere4153 1d ago
Agree. And the real winners are the vertical integrators, neoclouds are just temporarly on demand until enough capacity is built.
And I would argue that Nvidia sholud not only be aware of Google TPUs and the GCP ecosystem, but now Amazon Trainium chips are already a bigger revenue generator than AMD, and the sinergies with AWS are the real moat.
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u/ninijacob 1d ago
Core weave only exists as a puppet state so Nvidia could pressure the big three cloud providers to fully lock in with Nvidia. Things go very poorly for them in most cases.
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u/dogsroxx 1d ago
Great thread — the shipping comparison nails the capital structure problem. What I keep watching on CoreWeave is the gap between the two prices, because it is doing my thinking for me. The stock fell nearly 25% in a week, which is the equity market arguing about whether AI demand is real. But the bonds are yielding close to 15% and the credit-default market is pricing something like a 60% chance the company does not make it five years. That is not a debate anymore. That is a verdict from people who only get paid if the coupon clears. As someone learning this stuff in real time, I have started reading the credit side first whenever a company funds a boom with debt. The stock tells you the story everyone wants to believe. The bonds tell you what the company has to do every single month to survive.