As debt concerns intensify, Musk's warning delivers a heavy blow to "New Cloud" concept stocks.

Reuters, October 26 - In pre-market trading on Monday, New Cloud company shares fell after Elon Musk said (link) the sector may face consolidation and bankruptcy, intensifying concerns about the widening gap between artificial intelligence infrastructure investment and revenue.

CoreWeave CRWV.O has become a prime example of growing concerns over massive artificial intelligence spending, leading declines with a 4.5% drop, while Nebius Group NBIS.O fell 3.4% and IREN IREN.O dropped 3.3%.

Shares of Applied Digital APLD.O and TeraWulf WULF.O were both down over 2%, while Core Scientific CORZ.O declined 1.7%.

On Sunday, Musk posted on social media that New Cloud companies will face large-scale consolidation and failures, adding that SpaceX SPCX.O will not acquire any New Cloud companies.

“Over 200 New Cloud companies will face ‘guppy-level’ elimination and consolidation. Some will make it through, but not many,” he said.

CoreWeave and Nebius have not commented yet.

Musk is not the only one (link) highlighting risks in the industry.

Earlier this month, research firm Gartner said that among more than 100 “New Cloud” companies most affected by rising leverage, CoreWeave ranked first, adding that by 2032, 80% of those companies might cease independent operations.

Several brokers expect spending in the artificial intelligence sector to surpass $1 trillion next year, fueling concerns among investors about the consequences of heavy reliance on debt—especially as artificial intelligence assets face rapid depreciation and the market has factored in further rate hikes by the U.S. Federal Reserve.

“There is too much debt,” said Alberto Gallo, founder of hedge fund Andromeda Capital.

“These funds are being invested based on the assumption of unlimited demand for artificial intelligence computing, which has caused the credit market to concentrate on a single risk, while investor returns remain minimal.”

Amid these concerns, Nebius’s bonds maturing in 2034 63954QAQ9= and CoreWeave’s 21873SAL2= bonds maturing in 2033 have slid to historical lows.

CoreWeave, Nebius, Applied Digital and TeraWulf have all reported quarterly losses in the past year, while IREN has failed to turn a profit for three consecutive quarters, raising questions about their profitability.

This month alone, shares of CoreWeave, Nebius, and IREN have each fallen more than 30%. Investors betting on declines in their share prices have made at least $6 billion (link) in paper profits.

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