Is Fed Chair Kevin Warsh About To Pop CoreWeave's Bubble?

CoreWeave, a neocloud operator, has become a focal point in discussions surrounding the AI bubble. After investor Chamath Palihapitiya highlighted the rising bond yields on the company's debt, CoreWeave's shares experienced a significant drop, falling 24% in a week and trading at their lowest level since shortly after the IPO last March. The stock's decline has adversely affected the broader chip and tech sectors.

Fed Chair Kevin Warsh, who took office in May, has made it clear that he aims to reduce inflation, which has been persistently above the central bank's 2% target for five years. Warsh plans to achieve this through interest rate hikes, which have led to soaring Treasury yields. CoreWeave currently spends a quarter of its revenue on debt servicing, with most of its debt being floating-rate.

This high exposure to interest rates has made it challenging for the company to manage its finances, leading to negative free cash flow and accumulated operating lease liabilities.

Despite CoreWeave's strong demand, indicated by its $104 billion revenue backlog at the end of June and the addition of $25 billion to it in the third quarter, the company may face difficulties in scaling if it struggles with debt payments. In the worst-case scenario, CoreWeave could potentially go bankrupt, although this seems unlikely given Nvidia's close partnership and interest in its success.

Nvidia holds the second-largest stake in CoreWeave. As the company's debt is due by the end of the next year, refinancing the debt will be a critical test for the company. If interest rates continue to rise, CoreWeave's stock may face further pressure. Investors are advised to monitor treasury yields and Fed communications to gain insights into the stock's future.

The company's upcoming earnings report on November 11 will also provide valuable information on how it plans to navigate the high-interest rate environment, and investors should anticipate continued volatility.