Citi analyst Tyler Radke suggests that Microsoft is a more stable investment than neocloud providers in the current economic climate. While neocloud companies rely on debt to finance Nvidia H100 chip rentals, Microsoft maintains positive free cash flow without significant reliance on debt markets.
The neocloud sector faces pressure from rising borrowing costs. CoreWeave recently saw its shares drop 15% in a single day, while Oracle shares declined by 8.8%. Bond yields for CoreWeave have reached nearly 15%, reflecting the impact of a 30% increase in the 10-year Treasury yield since March.
Radke notes that neoclouds must pass these higher costs to customers through future contracts to remain viable. However, CoreWeave claims its current customer backlog is sufficient to cover its debt obligations. Research firm Gartner predicts that 80% of neocloud firms will lose their independence by 2030.
Despite the volatility in infrastructure-heavy firms, Radke highlights the financial health of software companies like Microsoft and Palantir. He argues that investing in Microsoft removes risks associated with the depreciation of AI hardware and the complexities of corporate debt funding.
