These firms you've never heard of are feeding fears the AI bubble could burst

Neocloud firms often finance themselves by signing long-term lease contracts with major tech customers who need quick access to computing power.

Firms can then borrow money using those contracts – plus the AI chips they purchase – as collateral, explained analyst Cory Johnson of "The Quiet Period" IPO research outfit.

He said debt is common across neocloud firms because the hardware has to be paid for up front.

Take the industry leader: CoreWeave. It's a fraction of the size of some of the Big Tech companies it serves.

But Johnson believes lenders sometimes consider the creditworthiness of CoreWeave's customers, like Microsoft or Meta, more than the company's when they lend.

"This helps explain how CoreWeave accumulated $35.1bn (£26.3bn) in debt," he said.

Some jittery investors appear to be having second thoughts.

CoreWeave stock has lost a quarter of its value over the past month, and it's not alone.

Shares in other neocloud firms like Nebius, IREN, and Applied Digital have all shed about that much if not more during the same period.

Debt investors also appear spooked, and are demanding ever-higher returns from several firms in the sector.

CoreWeave's CEO Mike Intrator has said that the market is acting "irrationally" and has expressed confidence in its business model. Some of the world's most consequential companies are queuing up for CoreWeave's infrastructure and other AI services.

Several neocloud firms have their roots in the volatile crypto mining industry, made of companies that generate cryptocurrencies, like Bitcoin.

Crypto miners use some of the same kind of physical infrastructure that is used to develop AI.

CoreWeave was founded in 2017 with a focus on mining Ethereum.

IREN, Core Scientific and Applied Digital also started in crypto mining.

Their infrastructure left them well-positioned when AI exploded in 2022 with the introduction of OpenAI's ChatGPT.

And neoclouds have benefitted.

"Some will make it through, but not many," he added.