Review Article - Interpreting Why CoreWeave’s Predicament Shakes the AI Boom

Reprint of the report from October 15, with no modifications to content

Anhata Rooprai/Aditya Soni

Reuters, October 16 - CoreWeave’s CRWV.O accumulating debts are raising a new round of concerns over the AI boom, as investors question: is there enough demand to support the tens of billions being borrowed to build data centers?

Despite Nvidia-backed NVDA.O company’s CEO assuring a strong backlog of orders, both its stock and bond prices have still seen steep drops (link) , further intensifying the broader tech stock sell-off.

Below are reasons for investors’ concerns, and what the troubles faced by this company could mean for the industry as a whole.

What does CoreWeave do?

CoreWeave rents out Nvidia processors’ computing power to companies developing and running artificial intelligence, with clients including MicrosoftMSFT.O and OpenAI.

It is one of the leading “new cloud” service providers. These emerging cloud companies are growing rapidly to meet the demand for scarce and expensive AI chips.

These “new cloud” companies allow clients to access computing power without having to build their own data centers. However, providing such computing power requires massive upfront investment in chips and infrastructure, typically financed through debt.

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What is its financial situation?

According to data compiled by LSEG, the company has never turned a profit and carries a total debt of around $50 billion.

In August, the company raised its annual capital expenditure estimate by $4 billion to between $35 billion and $39 billion (link). Analysts expect its revenue this year to approach $13 billion, with losses amounting to $2.13 billion.

Its bonds maturing in 2031 (rated as junk) now yield about 16%, while the cost of credit default swaps on its debt has climbed to about 1,000 basis points, reflecting intensifying lender concerns.

CEO Mike Intrator told staff in an internal memo obtained by Reuters that the company’s order backlog is sufficient to cover its debt obligations. By the end of the second quarter, the company had $104.2 billion in undelivered orders and secured over $25 billion (link) in new orders at the start of the third quarter.

Nvidia CEO Jensen Huang has also downplayed these concerns, stating that CoreWeave’s financial strength is improving and he does not consider it necessary to guarantee its obligations. The chip giant has agreed to acquire any of CoreWeave’s unsold capacity through April 2032.

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Why this could be a “canary in the coal mine”

CoreWeave’s business hinges on two points: demand for AI computing, and whether lenders are willing to finance the required infrastructure. But the sell-off in the company’s shares suggests that, despite company claims of strong demand, investors lack confidence in the latter.

The market is not so much worried about demand for AI collapsing, but rather that if demand were to drop sharply, higher borrowing costs could make the business much harder to sustain.

“This really looks more like investors questioning the funding sources for infrastructure construction, rather than a sudden collapse in demand for AI computing,” said Axel Rudolph, chief technical analyst at IG Group.

“CoreWeave is rapidly becoming the ‘canary in the coal mine’ for the AI trade,” said XTB head of research Kathleen Brooks.

Why is the market so worried?

Investors question whether AI revenues can grow fast enough to cover the costs of infrastructure building and financing.

CoreWeave must make huge upfront investments before it can earn income from contracts. Rising interest rates may push up financing costs, further squeezing returns.

The hardware itself introduces another risk. As new generations of chips are launched, older ones depreciate, forcing providers to continuously invest in replacements.

However, these concerns are not limited to CoreWeave alone. It’s estimated that this year U.S. tech giants will spend over $700 billion on AI infrastructure.

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Worst case scenario

A potential outcome could be a generally tighter financing environment, with lenders demanding higher returns or unwilling to fund other AI projects.

This might force providers to scale back expansion plans and cut back on equipment purchases, thereby impacting the computing capacity that clients expect.

Such setbacks could further raise market doubts that the “AI investment boom has outrun returns”, putting even more pressure on tech stocks.

The subsequent impact will depend on how the business is restructured, and CoreWeave’s links with big tech firms do not, in themselves, mean that its failure would trigger a wider financial crisis.

Who else is at risk?

Gartner estimates that by 2030, about 80% of emerging cloud service providers may go out of business, warning that expected AI revenues won’t support profitable returns on all planned infrastructure spending.

Neocloud rivals Nebius NBIS.O, Applied Digital APLD.O, and Iren IREN.O all saw their share prices fall in the recent sell-off. Credit default swaps for SoftBank 9984.T, which has heavily bet on OpenAI, have also risen.

Meanwhile, AmazonAMZN.O, AlphabetGOOGL.O, MetaMETA.O, and Nvidia’s credit spreads have also reached record highs, although their increase is far less than CoreWeave’s. However, these companies’ cash flow is more robust, and their balance sheets are stronger.

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