By Adam Levine

This article is from the weekly Barron's Tech email newsletter. Sign up here to get it delivered directly to your inbox.

The New Cloud. The artificial intelligence boom has invigorated the cloud units at the "hyperscalers" like Amazon Web Services, Microsoft Azure, and Google Cloud. But it has also given rise to smaller companies, the so-called "neocloud," that specialize in artificial intelligence computing. If you haven't heard the term yet, get ready.

These neocloud firms, most prominently CoreWeave and Nebius, have become both competitors and suppliers to the hyperscalers.

Recent deals highlight the risk and the promise for the neocloud companies. They are on the path of fast growth, but they'll need more cash to fund the capital expenditures that the growth necessitates.

Originally a crypto-mining outfit, CoreWeave is the poster-child for this new AI-native cloud. In 2022 it had $16 million in revenue, and that was up to $3.5 billion in the last 12 months. The stock listed on Nasdaq at the end of March and is up 197% since then.

The sales growth is built on a flywheel that is powered by the insatiable demand for renting AI cloud servers. CoreWeave raises capital, primarily through debt, to buy AI data centers, which it rents out in the cloud.

Selling debt fuels capital expenditures which powers revenue growth that allows the company to raise more debt. If any part of that stops, the whole machine could fall apart. Revenue growth has to keep justifying the high levels of debt, and any weakness may lead to an investor exodus.

But CoreWeave has a patron, Nvidia. It was Nvidia who catapulted CoreWeave into this race by making sure it got an early allotment of Nvidia's industry-leading AI accelerators in 2023, forcing Microsoft to rent capacity from CoreWeave. Microsoft represented 71% of CoreWeave's revenue in the second quarter, though CoreWeave has signed a number of new multiyear service contracts this year, including with one of the other hyperscalers.

Nvidia isn't just CoreWeave's most important vendor. It's also a customer and a significant investor. On Monday, CoreWeave announced its latest contract: $6.3 billion for Nvidia to purchase "any residual unsold cloud computing capacity." Nvidia is backstopping CoreWeave in case customers are forced to pull back on their commitments, slowing revenue growth and stopping the flywheel; the only thing that matters is that it keeps spinning.

Nebius also came to the neocloud business in a roundabout way. After the Russian invasion of Ukraine, Arkady Volozh, the founder and CEO of the most popular Russian website, Yandex, decided to sell all the company's Russian assets and focus on the small part that was neocloud. In the first quarter of 2023 it had just $5 million in sales; that was up to $105 million in the most recent quarter.

Since Nebius listed on the Nasdaq in October 2024, the share price has soared 381%. Much of the gain came at the end of last week when Nebius announced a new five-year service agreement with Microsoft -- worth $17 billion to $19 billion -- to provide overflow capacity to its Azure cloud. Much like it did for CoreWeave in 2023, a Microsoft contract is about to make Nebius a much larger company.

So Nebius is spinning up its own flywheel. The cash flows from the Microsoft deal will only cover part of the capital expenditures required, with the rest having to come from investors. This week, Nebius sold equity and convertible notes for a total of $4.2 billion.

CoreWeave raised $1.5 billion from its initial public offering, and has since added $7.2 billion in new debt commitments. With the company forecasting 2025 capex of $20 billion to $23 billion, it will need every penny and more.

The sky's the limit for the neocloud, but any hiccup in demand could reveal this cloud to be more of a bubble.

This Week in Barron's Tech

   -- Oracle Did Everything Right. It's Time to Take Profits. 
 
   -- Nvidia Stock Drops on Report China Has Banned Its Chips. What It Means 
      for Investors. 
 
   -- Software Companies Are Fighting Back With AI. The Stocks Are Still 
      Hurting. 
 
   -- Apple Stock Gains. What Preorders Say About iPhone 17 Demand. 
 
   -- Alphabet Hits $3 Trillion. Is It Time to Sell? 

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

September 17, 2025 16:19 ET (20:19 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.