Musk expects bankruptcies among over 200 AI cloud companies

Climbing borrowing costs for artificial intelligence data centers have triggered severe selling pressure on next-generation cloud computing companies in US stock markets. Tesla and SpaceX CEO Elon Musk projected that more than 200 cloud computing platforms with no independent cash flow outside data centers will enter an extensive consolidation process resulting in bankruptcies and mergers. In a statement on social media platform X, Musk said debt markets have effectively closed to these companies and only a small fraction of sector players will be able to survive.

Following Musk's statements, shares of Nebius, CoreWeave, and Iren lost over 4% in premarket trading in the stock market on Monday. As the session opened, a portion of the losses was recovered; while Nebius shares approached flat levels, the decline in CoreWeave and Iren remained around 2%. The downturn in the sector was felt more severely over the past 1-month period. CoreWeave and Nebius shares suffered losses exceeding 30% over the past 1 month, while the retreat in Iren shares reached 40%. The climb in CoreWeave's 5-year credit default swap (CDS) spreads to levels signaling financial distress and the rise in the company's bond yields deepened borrowing cost concerns.

Why did AI cloud companies enter a debt crisis?

Investors are questioning whether companies that took on heavy debt to purchase Nvidia's costly AI chips and build massive data centers can turn these investments into profit over the long term. Alongside Musk, whose SpaceX directly competes with these companies by offering computing capacity through its own data centers, industry representatives are also pointing to the danger of excess capacity. Social Capital founder Chamath Palihapitiya warned that idle computing capacity could emerge in 2027 above current forecasts. Palihapitiya predicted that some investments could generate returns below the cost of capital or remain completely idle, making 2027 a turbulent year with accelerating mergers and bankruptcies.

When are excess capacity and consolidation expected in the sector?

Despite bankruptcy concerns surrounding the sector, Nvidia CEO Jensen Huang said demand for next-generation cloud computing services remains strong. Speaking at the GTC event held in Berlin last week, Huang argued that the primary factor holding back expansion in AI infrastructure is not insufficient demand, but difficulty accessing working capital. Pushback regarding financial structures also came from the corporate front.

Nebius Chief Revenue Officer Marc Boroditsky stated that the company's debt structure differs from CoreWeave's, that all capacity coming online in 2027 can be sold to customers, and that this demand will carry over into 2028. Iren Co-CEO Daniel Roberts also reported that they are conducting customer discussions far exceeding the capacity they will bring online next year. In contrast, the market's focus remains on the question of when massive AI infrastructure spending will turn into cash flow and how companies will manage their mounting debt loads.

This content is for information purposes only and does not constitute investment advice.