Renting AI chips in the cloud has become one of the hottest areas of the artificial intelligence rollout. The business is also a topic of great debate on Wall Street, given growing worries about artificial intelligence demand, costs, and stock valuations.

Companies that originally used their data centers for mining Bitcoin have found a more lucrative role: supplying computing power for artificial intelligence.

CoreWeave and IREN -- now known as "neoclouds" -- have reoriented toward AI workloads, and their stocks have been surged, and tumbled, alongside hopes for AI.

Microsoft, Google, and Amazon don't have enough capacity to meet AI demand, so they are willing to sign contracts with the neocloud providers for guaranteed compute power. The chance that a multibillion-dollar deal with such hyperscalers could send shares soaring has attracted investors seeking the next major winner.

But the business is risky. Building data centers requires massive capital expenditure, and neoclouds typically rely on substantial debt to expand. They must secure permits, energy supplies, and specialized hardware -- often in tight markets. Even then, it usually takes years for a new data center to start generating revenue. That makes it important for investors to distinguish between companies capable of handling the cycle and those overreaching.

The Neocloud Model

At the center of the debate is the neocloud business model. Supporters view these companies as filling a valuable niche for AI demand. Skeptics see a fragile structure built on optimistic assumptions.

Veteran short seller Jim Chanos argues that neoclouds resemble landlords, not advanced tech firms, and therefore deserve lower valuations. He warns these companies are overbuilding in response to a temporary demand spike. Hyperscalers can redirect excess capacity to their internal workloads if AI growth slows; neoclouds lack that fallback. Their chip rental prices can be much lower than those from the hyperscalers, giving them a far thinner cushion in a downturn.

However, demand for AI compute currently appears overwhelming, with companies saying their capacity is fully sold out. Analysts at Synergy Research estimate aggregate neocloud revenue could grow roughly 69% annually through 2030.

"Gen AI platform services are currently growing at around 165% a year and neoclouds are gaining share in those high-growth markets," said Jeremy Duke, chief analyst at Synergy.

Picking the Winners

Choosing among the growing field of neoclouds is difficult. Semiconductor research firm SemiAnalysis counts more than 100 players, though only a handful have reached meaningful scale. Among the most prominent are CoreWeave, Nebius, and IREN.

CoreWeave is the largest and has built a revenue backlog of $55.6 billion through deals with OpenAI, Meta Platforms, and others. It has 2.9 gigawatts of contracted power and benefits from close ties to Nvidia, which provides early access to advanced hardware. Nvidia has also agreed to purchase any unused CoreWeave capacity through April 2032, providing a buffer against weakening demand.

But CoreWeave's model brings vulnerabilities. It relies heavily on third-party developers to construct and operate facilities; delays can materially affect earnings, as seen when the stock fell 16% in a day last month after a partner fell behind schedule. CoreWeave has begun shifting toward building more of its own sites.

Additionally, CoreWeave's perceived strength -- its relationship with Nvidia -- could fade if Google's custom chips make inroads into the AI processor market. CoreWeave currently only uses Nvidia chips, though the company told Barron's that it doesn't have an exclusive relationship with the chip maker.

CoreWeave faces concerns over its debt load, which stood at $14 billion at the end of September. High interest expenses contribute significantly to its costs. D.A. Davidson analyst Gil Luria, who rates the stock Underperform, argues CoreWeave appears to be generating only a 4% return on capital against a cost of capital of 9%.

CoreWeave declined to provide its own return on capital, but a spokesperson said its contracts are structured to deliver a risk-adjusted return above the cost of capital and typically include fixed payments regardless of utilization. Other analysts assume the company will improve margins and lower its cost of debt over time. According to FactSet, the stock carries an average price target of around $131, 70% above recent levels.

Nebius, based in Amsterdam and spun out from Russian technology group Yandex's international operations, is the second-largest neocloud by market value. It has mostly served smaller customers such as AI start-ups but secured a major win in September when Microsoft agreed to purchase $17.4 billion of capacity over five years, followed by a $3 billion Meta contract.

With $4.5 billion of debt -- less than its cash balance at the end of September -- Nebius is more conservatively financed than CoreWeave, though its neocloud business is much smaller. It had $146.1 million of revenue in its latest quarter, compared with CoreWeave's $1.37 billion.

Nebius expects to have 2.5 gigawatts of contracted power and an annualized revenue run-rate of $7 billion to $9 billion at the end of 2026. But it also depends on partners. Data-center developer DataOne is building the New Jersey site supporting the Microsoft contract, and its CEO has said the project is two months behind schedule because of supplier issues. Nebius didn't respond to requests for comment.

Nebius currently trades at a forward enterprise-value-to-sales ratio of 7.7 times, more expensive than the 5 times for CoreWeave, according to FactSet.

One neocloud taking a different approach is IREN, previously an Australian Bitcoin miner called Iris Energy. IREN builds and operates its own renewable-powered data centers. It also has one of the largest pipelines of contracted power -- which Microsoft CEO Satya Nadella recently said was the biggest bottleneck in the industry.

"The number one challenge in this industry is access to land, power and data-center space...and that's exactly what our platform is set up to target," IREN Chief Commercial Officer Kent Draper told Barron's.

IREN is smaller than its rivals, generating just $7.3 million in AI cloud revenue in the September quarter. Still, it is targeting an annualized run-rate revenue of $3.4 billion by the end of 2026. It recently won a $9.7 billion deal from Microsoft but is seeking additional partnerships to use its nearly three gigawatts of contracted power.

IREN declined to disclose its overall return on capital, but Draper said the Microsoft contract is expected to generate a levered internal rate of return of about 35% under conservative leverage assumptions and assuming no extra value from the hardware after the contract period. The company has a forward enterprise-value-to-sales ratio of 6.8 times, according to FactSet.

For many investors, neocloud stocks will be too speculative -- dependent on debt-fueled spending to meet a potentially temporary AI boom and vulnerable to being cut off by hyperscalers. But those who believe AI demand will continue to outpace capacity could find a buying opportunity amid the neocloud crash. CoreWeave offers scale and Nvidia's backing, Nebius provides customer diversification with less aggressive financing, and IREN appeals to those who think power and land -- not chips -- will be the industry's main bottlenecks.