The Midterms' Biggest AI Losers Aren't the Big Spenders. They're the Borrowers.

The Democrats swept the midterms on Nov. 3, taking over the House and Senate while flipping the governorships of at least five states. Three of those states -- Texas, Georgia, and Ohio -- are Tier-1 data center markets, and their incoming Democratic governors plan to throttle the construction of new data centers with tighter environmental restrictions.

That might sound like bad news for hyperscalers like Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), which are spending hundreds of billions of dollars annually to expand their AI infrastructure. However, those stocks rallied after the midterms because investors expected lower spending on new data centers to boost their near-term margins.

Meanwhile, neocloud stocks -- including CoreWeave (NASDAQ: CRWV), IREN (NASDAQ: IREN), and Nebius (NASDAQ: NBIS) -- sank after the midterms. These companies were growing much faster than hyperscalers because they provided dedicated cloud-based AI infrastructure services, but they were also unprofitable and highly leveraged. Let's see why that key difference makes them less appealing than hyperscalers in this choppy market.

How do neocloud companies differ from hyperscalers?

Amazon, Microsoft, and other hyperscalers sell entire ecosystems of cloud-based services. Neocloud companies only sell computing power for running AI applications.

By providing only raw GPU processing power, neocloud companies can process AI tasks more cost-efficiently than larger cloud infrastructure platforms such as Amazon Web Services (AWS) and Microsoft Azure. However, these companies are taking on significant debt and issuing additional shares to open more data centers and purchase more GPUs.

Most neocloud leaders also originally operated in other industries before repurposing their GPUs and rebranding as AI infrastructure companies. CoreWeave was an Ethereum miner, IREN was a Bitcoin miner, and Nebius once owned Yandex -- Russia's largest online search engine -- and its associated websites and apps.

CoreWeave stopped mining Ether after the cryptocurrency crash of 2018; IREN shifted all its spending toward AI data centers in 2024, and Nebius was forced to divest its Russian assets that same year after sanctions against Russia crippled its original business model.

These tiny companies initially grew rapidly as the AI market expanded, but they lacked the scale, profits, and robust cash flows of established hyperscalers. Those flaws were forgivable when interest rates were low, and the AI market was booming.

But over the past year, the Iran war and persistent inflation -- which drove the Fed to raise its rates for the first time in three years this September -- chilled the market and boosted its borrowing costs. CoreWeave and IREN also have significant exposure to Texas, where governor-elect Gina Hinojosa has called for a temporary suspension of all new data centers. Nebius, which operates data centers across Europe and the United States, is better diversified and has no direct exposure to Texas, Georgia, or Ohio.

Can neocloud companies survive the incoming headwinds?

CoreWeave ended the second quarter of 2026 with a staggering debt-to-equity ratio of 14.3, and is paying an average yield to maturity of 14.1% to 15.6% on its senior unsecured bonds. For 2026, analysts expect it to pay $2.98 billion in interest on that debt (23% of its revenue).

Nebius and IREN ended their latest quarters with debt-to-equity ratios of 1.7 and 3.0, respectively. They're both paying much lower yields on their bonds than CoreWeave, but their debt levels could also spike if the AI market cools off.

CoreWeave, Nebius, and IREN won't go bankrupt anytime soon. Nvidia holds significant stakes in CoreWeave and Nebius, as well as warrants in IREN. All three companies could issue additional shares to reduce their reliance on debt financing.

From 2025 to 2028, analysts expect CoreWeave's revenue to grow at a 104% CAGR. But with an enterprise value of $72 billion, it trades at just six times this year's sales. Nebius and IREN -- which are both growing faster than CoreWeave -- trade at 16 times and 12 times this year's sales, respectively. These stocks all look reasonably valued, but they'll remain under pressure until interest rates decline and companies are allowed to deploy new data centers again.

Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Bitcoin, Ethereum, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.