“Yikes.” That was my reaction to Wednesday’s US CPI report, which showed inflation across the world’s largest economy ran far hotter than expected last month.
“Yikes” was also Elon Musk’s reply to SPAC king Chamath Palihapitiya, who spent part of his Wednesday ogling a chart of CoreWeave’s beleaguered 2032s, which traded below 78 cents on the dollar midweek.
CoreWeave’s a controversial stock, to put it mildly. Along with Oracle, it’s the poster child for debt-funded data center buildouts, but unlike Oracle, it’s not too big to fail, it lacks Oracle’s connections in Trumpland and to the extent it has revenue streams other than renting out access to compute, they aren’t material.
There are the bonds. As you can see, they’re burning and now yield in excess of 15%.
The fundamental bear case is simple enough: CoreWeave’s borrowing heavily at increasingly punitive rates to fund its expansion, which means it’s just a giant, leveraged bet on AI demand growth.
If assumptions about AI demand prove overly optimistic, or even if it just turns out that the vast majority of AI-related compute needs can be met with less sophisticated equipment than what CoreWeave rents out, the business model could run into trouble.
As we’ve seen time and again this year, merely restating that bear case is often enough to send the stock tumbling. On Wednesday, it plunged 17% intraday, a move CEO Michael Intrator described as “irrational” in an internal memo.
The selloff counted among the five largest in CoreWeave’s short history as a public company.
In the same company e-mail mentioned above, Intrator said CoreWeave’s confident in its funding and insisted the backlog “more than supports” its debt obligations.
Not helping matters on Wednesday was CoreWeave bear Gil Luria, who showed up on Bloomberg TV to accuse the company of “destroying value at every turn.” Separately, he said the shares could go to zero in the event “the AI cycle sputters.”
There’s the clip. “CoreWeave’s gonna be the first to go,” Luria told The Prof G podcast, of a hypothetical Wile E. Coyote moment for AI demand. “The equity value’s gonna be zero.”
That’s not what you want to hear. The other two publicly-traded neoclouds fell sharply in sympathy, and Oracle was on track for its worst day in months, down more than 9%.
This was insult to injury for all things AI-related coming as it did amid a snowballing correction for semis. The SOX fell a sixth day and is now down more than 11% since last Tuesday.
Oh, and a report from advisory firm Gartner suggested eight out of 10 neoclouds could disappear within four years. “Neoclouds will be among the most exposed to the imbalance between revenue and capital spending,” a report dated Wednesday warned.
While the hyper-scalers “have massive and highly diversified revenue sources that could plausibly sustain AI investments for years,” the neoclouds “must soon earn returns” if they want to stay in business.
By 2030, the report went on, “cost pressure and a lack of a differentiating business model will force over 80% of neocloud providers to cease independent operations.”
CoreWeave rolling over would be quite a spectacle. I don’t know that it would amount to a “black swan” event, but it would certainly hurt the AI narrative at a time when it is already facing increased scrutiny over further investment. If the government were to refuse help — and remember, AI is a big part of their plan to boost GDP and reduce the debt — wouldn’t Microsoft or Meta have to step-in just to keep their own build-outs running smoothly?
I suspect one of the big boys will step in to shore them up by offering financing themselves in exchange for very favorable terms. At the end of the day, CoreWeave’s liabilities are a drop in the bucket for the hyperscalers and are at least backed by hard assets (even if those assets don’t end up holding their full value at today’s prices).
They might even loop in Papa Trump as the super intelligence dealmaker to stroke his ego. It’s a win-win-win!