Elon Musk's warning of an "industry reshuffle" dealt another heavy blow to the already stressed Neocloud sector.

Before the market opened on Monday, the stock prices of Nebius, CoreWeave, and Iren all fell by more than 4% at one point, but the subsequent decline narrowed, and they are currently fluctuating within the range of 2% to 3%. The trigger was a post by Elon Musk on the X platform on Sunday, in which he stated that more than 200 Neocloud companies would face "death and consolidation on a small-scale level." This statement further deepened the market's doubts about whether the debt-driven expansion in this sector could continue.

Over the past month, the Neocloud sector has suffered heavy losses – CoreWeave and Nebius have both seen cumulative declines of over 30%, while Iren has plummeted by more than 40%. This round of selling started earlier this month when the credit default swap spread for CoreWeave five-year bonds rose to levels that are generally considered a sign of financial distress. The yield on its bonds also increased accordingly, raising serious doubts among investors about the business model of this industry, which involves borrowing heavily to purchase NVIDIA chips and build data centers.

Elon Musk issues a warning of industry reshuffle

In a post on the X platform, Musk wrote: "Over the past few weeks, the debt market has almost completely closed off financing channels for all companies that lack substantial revenue outside of the AI data centers." He then added, "This means that more than 200 Neocloud companies will face a wave of small-scale failures and mergers. Some companies may survive, but not many."

Palihapitiya points out in the text that compared to current predictions, in 2027 there will be 'a large amount of partially idle computing power and accumulated computing power in inventory.' These assets 'have been purchased and paid for, but the actual returns are lower than the total capital cost, or they are just sitting idle.' He also stated, '2027 will be a year of turmoil, during which a number of wrong and poor bets will be eliminated, and it will also be a year of consolidation for a minority of players.'

It is worth noting that SpaceX, under Musk, operates its own data centers and sells computing power to the public, which constitutes a direct competitive relationship with Neocloud company.

NVIDIA and various Neocloud endorse the requirements.

In the face of market panic, NVIDIA stepped in to support this sector at the GTC event held last week in Berlin, Germany. NVIDIA CEO Jensen Huang stated in an interview with CNBC that demand for Neocloud in the market has "exploded."

"What's currently lacking is the working capital to support growth... because the demand in various fields of AI is simply too strong, leading to a scarcity of capital supply," said Jensen Huang. "The demand for capital far exceeds the supply, but this issue will eventually be resolved." NVIDIA is an investor in several Neocloud companies.

Nebius, the Chief Revenue Officer, Marc Boroditsky on the other hand, attempted to separate the company from the difficulties faced by CoreWeave. In an interview with CNBC, he stated, "We do not carry such a large debt burden," and claimed that if the company's computing power is launched as scheduled in 2027, it will be sold out completely, and in 2028, there may be another situation of "supply falling short of demand."

Iren and CEO Daniel Roberts also defend the demand prospects. "We understand the increasing attention from investors, but when we communicate with our clients, nothing has changed; the demand is still there," Roberts told CNBC last week. "Next year, the capacity we are discussing with clients is several times what we might be able to launch, and in the past month, the demand for 2028 has also begun to come into focus."

Debt pressure has become a core concern for the sector.

The core concern of investors is whether the business model of Neocloud company, which has taken on heavy debt to purchase expensive NVIDIA chips and build data centers, can continue to operate in an environment where capital markets are tightening. Musk's warning precisely targets this weakness: once the debt market closes off financing channels for companies lacking independent revenue, Neocloud, which relies on external capital for expansion, will face a survival crisis.

The changes in the credit default swap spreads of CoreWeave have already sparked market unease, leading to a continuous sell-off over the past month. Although NVIDIA and executives from various Neocloud companies have emphasized that there are no issues on the demand side, capital constraints on the supply side are becoming a Sword of Damocles hanging over the entire industry. The current disagreement in the market is whether the actual demand will ultimately translate into cash flows sufficient to cover high debt costs, and this answer may not be known until 2027.