At the lows on Thursday, CoreWeave was down more than 25% since the beginning of the week.
Had the losses held, the poster child for “subprime AI,” as one bear ungenerously describes the largest neocloud by revenue, would be one bad session away from notching its worst weekly performance as a public company.
Sentiment was dastardly following the midweek mini-panic that landed CoreWeave above the fold across the digital mediasphere. Elon Musk’s one-word assessment of the plunge in the company’s bonds — “Yikes” — didn’t help.
The bearish pile-on was such that CoreWeave risked succumbing to a self-fulfilling prophecy. In a testament to the perceived peril, the rumor mill was rife with speculation that Nvidia, which has a 10% stake, might have to rescue the company.
On Thursday, Jensen Huang weighed in. CoreWeave “doesn’t need” a backstop, he told Bloomberg. “Their cost of capital is actually decreasing.”
That was enough to stabilize the stock, but who knows for how long. A quick scroll through finance-focused social media suggests the peanut gallery’s still very much inclined to perpetuate a doom spiral. Indeed, to read some of the more abrasive color you’d think CoreWeave had already collapsed.
To be clear: This isn’t a dip that I’d buy personally. But as I mentioned in a comment on Wednesday evening, I doubt seriously that Nvidia and CoreWeave’s hyper-scaler clients would sit idly by in the event deteriorating sentiment pushes the company to the brink, which is possible when your business model’s as sensitive as CoreWeave’s is to the vagaries of capital markets’ manic cycles.
The figure above shows you the stock price (inverted) with the cost to insure against a default. At nearly 1200bps, CoreWeave’s CDS implied better-than-even odds of a credit event by 2030 when, according to a Gartner analysis, eight in 10 neoclouds may be out of business.
CoreWeave co-founder Brannin McBee didn’t do the company any favors when he told the FT that CoreWeave’s dream is to secure an IG rating so it can — and I’m quoting McBee directly — borrow “unlimited” sums of money from insurers. “Like, all the money in the world sits in the insurance tranche,” he said.
That was an own-goal. When the main concern around your company is its debt burden and your capacity to service that debt, telling the world’s foremost financial media outlet that if only you could, you’d leverage yourself to infinity, probably isn’t the best idea.
I’m in no position to dispute McBee’s contention that CoreWeave would be “immensely cash-flow positive” if it throttled back its expansion plans, but as the linked FT article obliquely notes (i.e., says without saying it), CoreWeave’s near-term IG aspirations look far-fetched set against consensus projections for negative free cash flow out to 2028.
The figure above’s worth highlighting: Put open interest on CoreWeave hit a record this month.
Not everyone’s as skeptical. If you ask Deutsche Bank — which knows a thing or two about lending to controversial borrowers — the plunge in the stock’s a buying opportunity.
“While more capital will be needed, this can happen at a steady pace and is backed by robust customer backlog,” the bank’s Brad Zelnick said, in a note, adding that CoreWeave’s “strong customer base, established record of execution, backlog conversion and leading infrastructure performance” support its issuer profile “relative to neocloud peers.”
Zelnick did concede the obvious. “There’s no doubt CoreWeave’s future is tied to the success of AI and demand for the underlying compute infrastructure supporting it,” he wrote, in the same note. “Thus its shares should reflect changes in sentiment here.”
Right, and that’s really the crux of the issue. The very near-term risk for CoreWeave is a negative sentiment spiral. Conceptually speaking, all leveraged business models are confidence games, which means confidence crises pose an existential risk.
Late Wednesday, when the shares lay smoldering in the ashes of that session’s mini-crash, The Information sneered at Michael Intrator’s characterization of the price action as “irrational.”
“He sold CoreWeave stock every week between April and the end of September while his fellow co-founders have also been selling regularly,” Martin Peers, the site’s editor-at-large, wrote. “Intrator could win some brownie points by pledging to stop selling his stock for a while.”
Today’s Whodathunkit?
“Huang addresses CoreWeave stock plunge: ‘I’m optimistic’ “
“There are emergency exits located throughout this cabin. Please take a moment to locate your nearest exit, keeping in mind that the closest exit may be behind you. In the event of an evacuation, leave all carry-on baggage behind and follow the emergency floor lighting to the exits. . . .”
If the closest exit is behind you, does it mean you missed the peak?
A little bit off topic but I do wonder whether the FT is still the world’s foremost financial media outlet.
Who would you nominate to take their place? (Sincere question)
Bloomberg, which is disappointing given I’m Anglo-Japanese!
Depends on what you’re after. Obviously, BBG still has a monopoly on the best data and, in most instances, on serious analysis of that data too. If you have a Bloomie, you remember the “old” MLIV, which is to say the MLIV that was Cameron Crise, Mark Cranfield, Mark Cudmore, etc. etc. That still exists, and most of those guys are still there, but to me it doesn’t feel the “same.” The point in bringing MLIV up is that the people who write that color are former pros. They know what they’re talking about. You’re not going to get that at the FT. As for Alphaville, it is and always has been a ripoff of… well, let’s just say it’s a store brand, watered-down version of “those we don’t speak of,” to quote The Village (i.e., Alphaville’s a crappy version of the site I used to help run in 2015/2016). But, on an article-for-article basis, the quality of FT‘s main content beats Bloomberg’s every, single time because frankly, Bloomberg’s staff journos just aren’t any good. I mean, they aren’t bad either, but they’re just journos. Nobody reads a “regular” Bloomberg article and thinks “Wow, that’s some fantastic work.” Hell, the Journal‘s a lot better than BBG in that regard too. The problem for people like me with WSJ and the FT is that when I’m reading about markets, I don’t want great journalism, I just wanna know what happened, where and when. BBG delivers that, and in a helluva hurry. And if I want to hear from people who’ve actually traded and had real money on the line, I can get that color on the Bloomie, along with every single dataset known to mankind and a 24-7 news feed that has no competition, let alone any actual peer services. That news feed is absolutely insane. There are headlines every, single second of every, single day, 365 days a year. So, Bloomberg (and the Bloomie itself) are indispensable for me, and certainly for Wall Street, but in terms of journalistic prestige, “regular” BBG (i.e., the public-facing website) just “ain’t it,” so to speak.
Financial reporting minute-by-minute is a thankless task. “Hey Heisie, get me a story of why stocks just sold off!” Especially when it’s not something explainable like algos on a rampage. They have to provide a one sentence explanation. It’s their job since some AI bot is anxious to take their place.
Hey, it’s like Star Wars! A battle between the Jedis (or samurais) who fought the markets back when they were man against man who have been replaced by robots against robots. But, on the bright side, spreads have narrowed and high frquency traders still can skim off billions a year.
Unless your an obstinate Luddite, what’s not to like?
CRWV’s bigger sister, ORCL’s CDS also moving up quickly, while their debt heads South. 5 yr CDS currently going vertical 288bps, Lehman went out around 700, just for a frame of reference, but were around 500 a couple of weeks before the window closed. Debt currently trading at 75-85 for YTM of 8.5% or so.
Perhaps a merger into Paramount, so the Ellisons won’t have to ask Donald for their money back
”Conceptually speaking, all leveraged business models are confidence games, which means confidence crises pose an existential risk.“ Well said!