Why CoreWeave's woes matter to the market
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Illustration: Brendan Lynch/Axios
CoreWeave's huge debts, giant spending plans and myriad financial ties to giants like Microsoft, Nvidia and OpenAI make it an ideal test of whether the AI boom can stand up to serious market scrutiny.
Why it matters: If the recent sharp sell-off in CoreWeave's bonds means bond investors are less interested in funding the data center build-out, it could mark a major change for the AI boom that has been powering the U.S. economy and stock market.
Flashback: The data center boom was once paid for with massive profits produced by giants like Amazon, Meta and Alphabet. Now, it depends on cash raised in the bond markets.
Catch up quick: And bond market investors seem to be saying that they're no longer interested in providing easy money, at least to some of the heavily indebted players, like CoreWeave.
- Yields on CoreWeave bonds maturing in 2032 continued to hover near 15%, though prices did rally somewhat Thursday, after a brutal drop earlier in the week. (Bond yields and prices move in opposite directions.)
- And its shares had a bit of a recovery, ending up nearly 6%.
- The price of insuring against CoreWeave's default shot sharply higher intraday Thursday, underscoring the doubts over its business model if its borrowing costs remain this high. (Like Coreweave's share price, it too reversed later in the day.)
Zoom in: CoreWeave borrows money to build data centers that it leases to those in need of more computing power and willing to pay up for it.
- That sounds like a pretty logical business model.
Here's the thing: Building data centers is really, really expensive. And CoreWeave has had to borrow a lot of money to do it. At the end of June, it had about $35 billion in debt and another roughly $16 billion in debt-like lease liabilities.
- But that's almost certainly not enough, as CoreWeave continues to burn through cash as it keeps building data centers.
- CoreWeave reported negative free cash flow of -$5.7 billion in its most recent quarter.
- What does that mean? More bond market borrowing! Or, alternatively, a cash infusion from a deep-pocketed investor. (It just so happens that Nvidia is CoreWeave's second-largest shareholder, with a $3.3 billion stake.)
The latest: Jensen Huang, the CEO of Nvidia, didn't seem in a rush to find his checkbook Thursday, telling reporters in Stockholm, per Reuters, that he saw no need to help out CoreWeave: "I'm optimistic. Their cost of capital is actually decreasing."
Reality check: When yields on your debt spike and your stock price tumbles, your cost of capital is not decreasing. It is increasing.
- And that's the heart of CoreWeave's problem.
What they're saying: "CoreWeave does not just need customers willing to buy the compute. It needs lenders willing to fund the hardware on terms that leave something attractive for shareholders," wrote Bernstein analyst Madison Rezaei.
- "In our view, the company's long-term business model remains economically challenged."
What to watch: Whether CoreWeave's borrowing costs do get significantly cheaper in the coming days.
- If they don't, the company will eventually have to adjust, either by slowing its investment, coming up with a new source of investment capital, or having a credible market player — if not Nvidia, perhaps CoreWeave's key customer Microsoft — make a gesture that convinces investors that it would backstop CoreWeave's obligations.
- But that would have to be quite a gesture.
