Mark Zuckerberg Just Explained Why Iren Has an Edge Over Other Neoclouds

Great art isn't always realized in its time. Data-center company Iren (NASDAQ: IREN) looks like the ugly duckling as Nebius (NASDAQ: NBIS), Hut 8 (NASDAQ: HUT), and Terawulf (NASDAQ: WULF) sign lucrative, long-term deals with hyperscalers. Iren has made some deals, but none of them have been as exciting as the deal with Microsoft (NASDAQ: MSFT) way back in November.

Meta Platforms (NASDAQ: META) Chief Executive Officer Mark Zuckerberg recently validated Iren's strategy when he discussed compute after reporting second-quarter results. It shows that Iren has been right all along to avoid making big deals, instead taking a cautious approach with its future capacity.

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These words changed the entire thesis

Meta Platforms made a lot of headlines earlier in the year when it announced its intent to become a neocloud provider.

There are valid questions about Meta Platforms' ability to enter that segment since the company is leasing compute from AI data center providers. A company that needs more compute for its own services isn't in a great position to give out compute to others.

However, the bombshell for Iren's business model came when Zuckerberg uttered these words during the Q2 earnings call:

"We're getting a lot of offers for compute at a significant premium over what we paid for it."

Compute is getting more expensive with time, and demand substantially outstrips supply. Meta Platforms expects to "grow a large business serving large customers" in this industry in the future. It's further validation of Iren's business model.

Other neoclouds have been making big deals

The activity of other neoclouds has made it look like Iren's executives have been sitting on their laurels. Earlier this year, Nebius signed a five-year deal with Meta Platforms for $27 billion, with the total megawatts being undisclosed. Meanwhile, Hut 8 announced a second 15-year lease worth $9.8 billion with an unnamed hyperscaler. That deal covers 352 megawatts.

Terawulf also signed a 20-year deal with Anthropic for $19 billion that covers 401 megawatts. Notably, Terawulf and Hut 8 operate co-location models, in which customers are expected to provide their own chips. Iren and Nebius charge higher prices because they supply all of the AI infrastructure.

Iren has been making some deals. It recently added $2.8 billion in new customer contracts. That's impressive, but it's not as high as Nebius' figures. While the lack of a splashy deal has discouraged investors, it's actually bullish in the long run that Iren is holding back.

As compute gets more expensive, competitors are taking themselves off the board

The Terawulf deal is pretty significant for describing the bullish outlook for Iren. Terawulf is giving Anthropic 401 megawatts that will not return to the market for 20 years. Once that facility is ready to be monetized -- likely in the second half of 2027 -- hyperscalers cannot compete for those megawatts until 2047.

The deal looks good now since Anthropic is a big name, but averaging $950 million per year for 401 megawatts of critical IT capacity will look even better in 2040. It might even look like a bargain for Anthropic by 2030.

That's 401 megawatts off the board as compute supply remains tight. The second lease between Hut 8 and the unnamed tech company took another 352 megawatts out of the equation. It's still unknown how many megawatts of critical IT load Meta Platforms got from Nebius.

As competitors rush to sign long-term deals for vast amounts of computing power, Iren's capacity becomes more valuable. Iren's leadership isn't in a rush to get into a bad deal that won't make it any money until 2027 or 2028.

Capital has been one of Iren's weaknesses, but it now has $7.6 billion in cash and cash equivalents on its balance sheet. Furthermore, the company has been securing high prepayments from customers, which can make the company less reliant on debt in the future.

Every AI data center provider receives validation from Zuckerberg's remarks, but Iren has nearly 6 gigawatts in its pipeline and has been more cautious than competitors about giving them out. It's frustrating for investors who want immediate gains, but long-term investors may come to appreciate this approach.

Marc Guberti has positions in Iren. The Motley Fool has positions in and recommends Meta Platforms and Microsoft. The Motley Fool has a disclosure policy.