CoreWeave and Nebius Group: 1 Soars, the Other 1 Plunges. A Tale of 2 Neoclouds

The lingering question about the future of artificial intelligence (AI) is whether the relentless demand is sustainable and how long it can reasonably last. The increasingly negative public opinion about data centers and the recent resignation of Nvidia CEO Jensen Huang have only complicated an already complex question.

The results of neocloud operators might provide some much-needed insight. This budding segment of cloud computing stockpiles graphics processing units (GPUs) and other high-performance chips to provide users with the computational horsepower necessary for AI processing. Demand for the so-called GPU-as-a-service (GPUaaS) offers an alternative view of the industry.

CoreWeave (CRWV -6.45%) and Nebius Group (NBIS -8.81%) are the bellwethers of this nascent movement and, as such, have captured the attention of investors as standard-bearers for the broader adoption of AI. CoreWeave released its financial results after the market close on Tuesday, and Nebius Group was close on its heels on Thursday. Investor reactions to the results tell two very different stories.

Image source: The Motley Fool.

Weaving together an impressive quarter

CoreWeave has the distinction of being the world's largest neocloud provider, and the company's third-quarter results help demonstrate why. Revenue surged 168% to $3.66 billion, while its operating income grew roughly fourfold to $207 million. A heavy debt load and the resulting interest weighed on its bottom line. As a result, its per-share loss widened to $1.27, from $0.22 in the prior-year quarter.

To give those numbers context, analysts' consensus estimates called for revenue of $3.56 billion and a loss per share of $1.46, so the company cleared both hurdles by a comfortable margin.

CFO Nitin Agrawal revealed that CoreWeave would collect $9 billion in customer prepayments over the next three months and had paid down half of its existing delayed-draw term loans (the oldest and most expensive) -- which help fund its capital expenditures (capex). He also noted that the company's weighted average cost of debt had fallen to 7.9%, well below the rate on its unsecured notes, at about 15%.

Equally telling was the company's growing backlog, which soared 138% year over year to $132.5 billion. That growing book of future business fueled a robust forecast.

Management boosted the company's full-year outlook, forecasting revenue of $13.15 billion at the midpoint of its guidance, up from $12.8 billion issued just three months ago.

Investors cheered the good news, as the stock surged 25% on the day following its report.

Blistering growth, but...

Not to be outdone, smaller rival Nebius Group reported even more impressive results, albeit from a smaller base. For the third quarter, revenue growth accelerated, surging 571% year over year to $981 million. The company reduced its adjusted net loss to $38 million, down from $120 million in the prior-year quarter, resulting in a loss per share of $0.13.

For context, analysts' consensus estimates called for revenue of $907 million and an adjusted loss per share of $0.63, so Nebius cleared both hurdles with room to spare.

However, that's where the two parted ways. Nebius lowered its full-year outlook to the lower end of its range of $3 billion to $3.4 billion -- with management noting that a portion of this year's revenue was moving into the first part of next year. At the same time, Nebius increased its capex forecast to $27 billion for the fiscal year, up from its previous guidance range of $20 billion to $25 billion.

Unfortunately, the results gave investors pause, sending the shares down 16% on the heels of the results.

The biggest takeaway

So why did the two biggest neocloud operators go in different directions?

For its part, CoreWeave addressed one of investors' biggest concerns. The company's pivot from expensive unsecured debt to delayed-draw facilities -- and its use of customer contracts to secure the loans -- has significantly reduced its cost of debt. Moreover, the $9 billion in customer prepayments over the next three months will provide CoreWeave with a greater degree of financial flexibility.

On the other hand, the combination of lower guidance and higher spending was the one-two punch that weighed on Nebius Group. However, the bigger concern was the delays in bringing capacity online, which shifted a portion of its expected revenue into next year.

Simply put, while both companies are growing at a rapid clip, CoreWeave's execution is giving it the edge -- boosting investor confidence. Furthermore, at just 3 times sales, CoreWeave's valuation is much more attractive than Nebius Group at 22 times sales.

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