Strategists at BCA Research recommend short selling a basket of neocloud stocks, including CoreWeave, while taking a long position in four hyperscalers, including Alphabet. - MarketWatch photo illustration/iStockphoto
Neocloud companies are providers of computing power that are benefiting from massive investment by hyperscalers as the artificial-intelligence infrastructure build-out continues. But Noah Weisberger, chief strategist at BCA Research, believes the neoclouds may "destroy capital" as they invest borrowed cash to grow what will turn out to be a low-margin commodity service.
In a recent research report, Weisberger and colleague Dishaan Pandey presented data indicating that six neocloud companies' heavy capital expenditures would lead to much lower returns on invested capital than the hyperscalers would derive from their own capex.
Neocloud stocks have been volatile. For example, shares of CoreWeave CRWV were up 39% for the first half of 2026 but fell 28% in July. The stock is now up 27% for the year.
"The neoclouds benefit from spending higher up the food chain," Weisberger told MarketWatch, "but they are spending a lot of capital to get those revenues in the door."
He also said that although there are "legitimate questions about the pace of capex" for hyperscalers, this group — which includes Microsoft MSFT, Alphabet GOOGL, Meta Platforms META and Amazon AMZN — is earning well above its cost of capital, while the neoclouds are showing negative returns on invested capital, on average.
BCA is recommending a two-legged trade, with 80% being a long position in those four hyperscalers, weighted by market capitalization. The remaining 20% would be the short sale of a basket of six neocloud companies, also weighted by market capitalization. The six companies for the short trade recommended by BCA are CoreWeave CRWV, Nebius Group NBIS, Applied Digital APLD, Iren IREN, TeraWulf WULF and Cipher Digital CIFR.
"Since hyperscalers have a beta of approximately 1.2 to the S&P 500 and neoclouds are much more volatile, with a beta of 2.9 (calculated over the last 2 years), we are structuring our trade to target a net beta of 2 to the S&P 500," the analysts wrote in the report.
Questioning profit margins and valuations over the long term
Weisberger acknowledged that the neoclouds are "still in the ramp-up phase," but said they would eventually compete in a generic space for commodity cloud-computing services, and have relatively low valuations to revenue and earnings as a result.
"In the worst-case scenario they destroy capital," he said, while in the best case, the neoclouds will be "cyclical leasing companies."
Here's a chart from BCA showing how high capital spending is projected to be in 2026, relative to revenue, for 13 technology companies, based on consensus estimates among analysts polled by FactSet. The six neoclouds are on the left:
The six neocloud companies at the left of this chart have been "paying a lot for every dollar of revenue they are bringing in," according to Noah Weisberger, chief strategist at BCA Research. - BAC Research
Other analysts expect neocloud stocks to soar over the next year
Despite the BCA team's bleak outlook for the neocloud companies' profit margins and stock valuations over the long term and its short-sale recommendation, analysts for brokerage firms see plenty of room to ride for this group over the next year.
Analysts polled by FactSet have majority buy or equivalent ratings on all 10 stocks mentioned in this article, along with the additional three (Oracle, Equinix and Digital Realty Trust) shown on the chart above.
With the 13 companies listed in the same order as on the chart, here is a summary of 12-month price targets, along with forward price/sales ratios.
Company
Forward price/sales
Aug. 19 price
Consensus price target
Implied 12-month upside potential
Cipher Digital CIFR
11.2
$15.89
$32.17
102%
TeraWulf WULF
11.8
$15.50
$36.61
136%
Iren IREN
4.8
$42.84
$82.80
93%
Nebius Group NBIS
6.9
$223.90
$288.88
29%
Applied Digital APLD
7.5
$28.23
$74.21
163%
CoreWeave CRWV
2.3
$90.87
$144.12
59%
Oracle ORCL
4.2
$143.81
$249.45
73%
Equinix EQIX
9.7
$1,077.08
$1,235.07
15%
Meta Platforms META
4.9
$546.03
$745.98
37%
Digital Realty Trust DLR
9.4
$192.35
$223.55
16%
Microsoft MSFT
8.9
$484.31
$563.92
16%
Alphabet GOOGL
7.4
$344.72
$426.68
24%
Amazon.com AMZN
3.2
$265.84
$329.63
24%
Source: FactSet
The table shows forward price/sales ratios because the consensus among analysts is that the neocloud companies will show net losses for the next 12 reported months combined. The forward price/sales ratios compare with weighted valuations of 7.4 for the S&P 500 information technology sector and 3.2 for the full S&P 500 SPX.
Click on the tickers for more about each company, exchange-traded fund or index.
