CoreWeave shares, bonds slide further as AI debt fears mount

AI-focused cloud company CoreWeave experienced a significant decline in its shares and bonds on Thursday, with the share price dropping by 6% in premarket trading after a 15% decrease on Wednesday. This sharp decline marks one of the most severe investor confidence crises in the AI industry, which is increasingly driven by borrowing. The company's bond yield surged above 16%, a level typically associated with distress, prompting criticism from tech mogul Elon Musk.

CoreWeave, which possesses approximately $50 billion in debt, has become the focal point of growing doubts about whether the tech industry can sustain the data center boom that has led to heavy borrowing and strained cash flow, even for established firms like Alphabet-owned Google. The price of insuring the Nvidia-backed company's debt against default has risen to around 1,000 basis points, indicating a nearly 63% chance of default within five years, up from about 30% the previous year.

The neocloud providers, led by CoreWeave, rely on tight supply and costly Nvidia processors to meet the soaring demand for computing power in the tech industry. Critics argue that these firms are exposed to any cooling in AI demand, as well as the value loss of chips as newer generations arrive, necessitating further spending to replace them. CoreWeave recently increased its annual capital spending forecast by $4 billion, projecting revenue of nearly $13 billion for the year and a loss of $2.13 billion.

Growing concerns about the data center build-out, expected to see over $700 billion in US tech sector spending this year, have impacted other tech stocks hard. The Philadelphia Semiconductor Index has lost over $1.6 trillion in market value over the past six sessions, with the tech-heavy Nasdaq declining more than 3% in the same period.

As a result, the broader market has also experienced a decline, with tech shares falling across Asia, Europe, and the US, contributing to a broader market downturn driven by fears of rising interest rates potentially causing a reckoning for the sector.