Nscale CEO Josh Payne. AI chip leasing firm Nscale has submitted listing application materials and plans to enter the capital markets. The company is merely a relatively small, recently established newcomer in the neocloud sector.

At first glance, its prospects appear bright: revenue has grown rapidly over the past year, and the scale of contract backlog it holds is already comparable to that of veteran competitor CoreWeave. However, nearly all of Nscale's $103 billion in contract commitments depend on data centers that have not yet broken ground, or even have not fully secured construction funding. The company also has not obtained the Nvidia chips needed to fulfill its obligations. This makes Nscale a typical microcosm of the inherent risks in this round of AI enthusiasm. It also indicates that its IPO sought valuation of $35 billion is clearly overvalued, and a reasonable valuation may be less than half that figure.

Let us go through this from the beginning. Nscale has been operating for only two years and only landed its first AI data center in Norway in August 2024. Through a series of acquisitions and joint ventures, it currently has five data centers in operation, with total computing power of 0.5 gigawatts; at the same time, it has signed agreements to build another 12, with planned total computing power set to rise to 10 gigawatts.

Revenue is growing rapidly. In the first half of this year, revenue was $140.6 million, compared with only $10.4 million in the same period last year, reflecting the results of earlier expansion. But that figure cannot represent Nscale's long-term growth potential. Its long-term value depends on whether it can bring all of its planned data centers online as scheduled. Constrained by power supply shortages, existing cloud providers are struggling to secure sufficient electricity for data centers under construction, so achieving the targets at least within the planned timetable presents no small challenge. This week, Oracle invoked a force majeure clause to avoid potential financial liability arising from delays at a data center project in New Mexico, where the site is currently facing power supply difficulties.

Some of Nscale's contracts include provisions that give customers the right to terminate if the company fails to deliver computing power on time. The listing documents show that this includes its agreement with Anthropic, an order that accounts for nearly half of its contract backlog. The prospectus also discloses that Nscale has not even secured the financing funds corresponding to the Anthropic project.

Nscale previously announced that it would work with OpenAI and industrial company Aker ASA to build the "Stargate" project in Norway, a collaboration initially announced last July. Fortunately for Nscale, Microsoft later took over and accepted that computing resource. But the matter itself has already highlighted the many difficulties of data center development.

Portugal Project 2028 is a key point for Nscale. The company plans to begin delivering multiple large computing orders by late 2027, including the Anthropic agreement, as well as a contract recently signed with humanoid robot startup Figure AI. Also starting in late 2027, Nscale will deploy 66,000 Nvidia Vera Rubin GPUs at a data center in Portugal to provide computing power for Microsoft; the scale of Nscale's order with Microsoft is roughly comparable to the Anthropic order.

Assuming Nscale can deliver everything by early 2028, which is highly uncertain, how much revenue could it generate that year? S&P Global Market Intelligence data shows that under the most optimistic scenario, 2028 revenue would be about $16 billion, and only that level of revenue could support a $35 billion valuation, as the transaction valuations of CoreWeave and Nebius are both 2 to 3 times their estimated 2028 revenue. But that estimate is almost certainly too optimistic.

Nscale's contracts have an average term of 5.7 years. The Anthropic and Microsoft contracts are each about $44 billion in size. If spread evenly over six years, together they could bring in about $14.6 billion in revenue annually over that period. But these orders will gradually scale up as new data centers come online, meaning revenue will be concentrated in the later part of the contracts rather than spread evenly over the contract period. Figure AI initially committed to purchasing $3.5 billion of computing power from Nscale and "plans to expand to more than $6 billion." The two sides did not disclose the contract term; referring to Nscale's average contract length and assuming a maximum of six years, that would contribute at most $1 billion in revenue annually.

If the Anthropic and Microsoft orders realize only half of their potential revenue in 2028, even though that assumption is already somewhat optimistic, Nscale's revenue that year could reach $8 billion. That figure corresponds to the valuation Nvidia and other investors gave Nscale in a funding round in March of this year.

Investors interested in Nscale also need to consider other variables. Short-term computing prices are rising. For example, CoreWeave raised prices by 25% in July and later increased them again. But Nscale currently has little available computing power and almost no idle capacity to capture the benefits of higher prices. Like many neocloud providers, customer concentration is a major risk for Nscale. About 42% of its contract backlog comes from Microsoft, while Microsoft is building more of its own computing capacity and reducing reliance on third-party data centers. Anthropic also accounts for a very high share.

The biggest risk is the funding gap. Data center construction is a highly capital-intensive business. As interest rates rise, investor interest in AI-related debt is declining, and data center financing faces pressure both in terms of cost and availability of funds. As of June 30, Nscale's debt scale was relatively small, but since then it has added nearly $11 billion in debt. Last Friday the company announced it raised $3.36 billion through convertible loan notes, of which $1 billion came from Nvidia. But Nscale still needs more funds: the listing documents show that across its data center sites, total equipment procurement commitments amount to $24 billion and need to be paid this year and next, while as of June 30 the company had only $1.5 billion in cash on its books.

To make matters worse, Nscale's losses continue to widen. In the first half of this year, cash burn was about $1.6 billion, an increase of more than 1,000% year over year. Rising interest rates, plus price increases by Nvidia or other data center hardware suppliers, will further increase the difficulty of Nscale achieving profitability. If Nscale cannot obtain more loan funding at a reasonable cost, it will be difficult to convert more than $100 billion in order backlog into actual revenue. The market's willingness to absorb AI-related debt is also an unknown.

The head of Blackstone's AI investment team said last week at The Information's AI Agenda forum in San Francisco that Blackstone is still studying exactly which types of investors are willing to provide capital to support this massive AI infrastructure buildout. "We have not yet figured out who will buy all of this debt," Khaira said. "We have some guesses, but honestly, we do not know where all the money will come from."