Investors that actively follow artificial intelligence (AI) equities are probably familiar with at least a couple of the “neocloud” stocks, but they may not be well-versed in exactly what that term means.
Think of neocloud as next-generation cloud computing dedicated entirely to AI and high-octane GPU-as-a-service (GPUaaS). It’s different than traditional cloud platforms such as Amazon Web Services (AWS), Google Cloud and Microsoft’s Azure.
“The term neocloud refers to specialized cloud infrastructure providers dedicated to AI workloads,” notes Cisco Systems. “By leveraging high-performance hardware compute accelerators—primarily GPUs—these providers support the diverse and demanding AI application needs of any organization, including enterprises, model builders, and hyperscalers.”
There’s a fair amount of publicly traded neocloud companies and for an interesting reason: Many used to be Bitcoin miners, but they’ve evolved. For investors that want to nibble at this space without the stock-picking burden, there’s an ETF for that: The Roundhill Neocloud ETF (NCLD), which debuted on Aug. 6.
NCLD Could Be Nifty
It’s not a stretch to say NCLD is attempting to catch lightening in a bottle on par with its stablemate, the Roundhill Memory ETF (DRAM). Perhaps the actively managed NCLD will accomplish that feat, but it’s a tall order.
That said, the thesis behind the new ETF is supported by some compelling fundamentals. For example, Morgan Stanley forecasts that hypperscalers will spend $2.9 trillion on global data centers through 2027 with compute demand far outpacing supply. GPU demand explains the hyper-focus of neocloud companies, underscoring why NCLD could potentially be an asset for tactical investors.
“That specialization is the whole point. A neocloud is not trying to host your website, your database and your email,” notes Roundhill’s Thomas DiFazio. “It is trying to give an AI lab thousands of the latest accelerators, wired together with fast networking and tuned software, faster and often cheaper than a general-purpose cloud can. The customer is not buying square footage or generic servers.”
An interesting element in the neocloud investing equation is that clients of the companies residing in NCLD sign long-term contracts, typically signing up for a fixed amount of GPU per year at a set price. That provides some element for revenue clarity for market participants.
Perusing NCLD Cloud Holdings
Admittedly, this piece was written before NCLD’s official debut, so I’m taking an educated guess as to which stocks will be included in the ETF. It’s probably a safe bet that Applied Digital (APLD), CoreWeave (CRWV), IREN (IREN) and Nebius Group (NBIS) will be among them.
These aren’t for the faint of heart of stocks. CoreWeave is young as public company. IREN has been derided for excessive executive compensation. However, those points and others don’t diminish the broader neocloud investment thesis. If anything, those factors highlight the potential allure of NCLD because the ETF eliminates the need to stock-pick.
“The neocloud story is a story about where value accrues in artificial intelligence,” adds DiFazio. “Enormous attention goes to the model builders and to the chip designer at the center of it all. Neoclouds occupy the layer in between, the infrastructure that turns chips and power into usable AI capacity, and that layer has become indispensable precisely because everyone, from startups to hyperscalers to Meta, needs more of it than they can build themselves.”
