Analysis-Why CoreWeave is in the crosshairs of the AI scare

CoreWeave, a U.S.-based cloud company, has become a target of investor concerns regarding an artificial intelligence (AI) bubble. The slump in CoreWeave's shares and bonds follows third-quarter reports from hyperscalers indicating potential delays in data center projects and a slower pace of growth in capital expenditure. Investors view neoclouds like CoreWeave, which heavily borrow to finance chips, land, and energy for data centers, as the weakest links in the AI ecosystem due to future income uncertainties.

CoreWeave shares dropped more than 15% this week, and yields on its 2030 bonds surged 500 basis points to near 16%. The company's chief, Mike Intrator, noted that markets might sometimes misunderstand and act irrationally, but CoreWeave has a strong pipeline of demand. However, investors are more focused on the company's $50 billion debt and the risks of being caught between chipmakers and clients.

CoreWeave's debt is primarily fueled by capital expenditures, leading to significant cash burn. While revenue is expected to double this year, capital expenditure is projected to quadruple, exacerbating the cash burn. Critics argue that CoreWeave's reliance on debt financing is problematic, especially if utilization of its assets slows down or data center construction faces delays.

The company's debt is marked as speculative grade, but its credit selloff could potentially become a self-fulfilling prophecy, as investors may doubt its ability to deliver capacity.