The business of leasing high-performance AI computing chips is experiencing an unprecedented boom, but a wave of new competitors is poised to disrupt this lucrative market.
CoreWeave, Inc. recently reported quarterly earnings that show AI computing supply remains extremely tight, with prices staying elevated. This should allow "new-style cloud service providers" like CoreWeave, Inc. to extract more profits. Even older-generation chips are in high demand, offering a temporary rebuttal to bears like Michael Burry, who worry that expensive hardware assets will eventually depreciate. NVIDIA is a key shareholder in CoreWeave, Inc., giving the company priority access to the latest chips from Jensen Huang.
However, a host of powerful new rivals are also vying to capitalize on the AI computing shortage. The most notable is another major NVIDIA customer: the deep-pocketed Elon Musk's SpaceX. This company, no longer content with just building rockets and satellites, is now pivoting to selling ground and orbital computing resources. This has led one analyst to describe the $1.8 trillion company as "the new elephant in the server room." The danger is that CoreWeave, Inc. could be pushed aside or even crushed.
CoreWeave, Inc., which began as a cryptocurrency mining firm, now rents out NVIDIA graphics processing units (GPUs, the workhorses of AI computing) to chatbot makers like OpenAI and Anthropic PBC, tech giants, and corporate clients. Since its IPO last year, the company's journey has been bumpy, with high debt and rapid cash burn unsettling investors. Its founders cashing out over $2 billion in stock has only added to the woes. From May to late July, amid market turbulence sparked by the AI-focused hedge fund Situational Awareness, the stock price fell by roughly two-thirds. However, earnings released on August 11 have bolstered a recent recovery.
Like SpaceX, Mark Zuckerberg's Meta Platforms Inc. has also announced plans to sell idle computing capacity, bringing another industry giant into the arena (interestingly, Meta itself is a customer of CoreWeave, Inc.). For new-style cloud service providers, a broader concern is that chips costing tens of thousands of dollars each will eventually be replaced by newer technology, leaving buyers swamped in a flood of depreciating assets. Fortunately, this is not a major issue for now, as demand for computing power still outstrips supply. AI chips purchased a few years ago can still be rented out at decent prices.
Earlier this month, Jensen Huang disclosed that leading Wall Street institutions could provide up to $500 billion in potential funding to NVIDIA customers, helping them shoulder the staggering hardware costs. He also noted that processors launched in 2020 are still in commercial use. This means that even if these chips have been fully depreciated on buyers' books, they can continue to generate returns. Of course, the debate over when chips become obsolete is far from settled; the strong demand for older chips is partly due to the shortage of newer ones. But the market tightness is likely to persist for some time. Most advanced chips are produced by TSMC for NVIDIA and others, and TSMC cannot expand capacity quickly enough. Memory chip manufacturers face similar challenges.
This actually benefits companies like CoreWeave, Inc. Overcapacity would erode profits, but the current supply squeeze reduces this risk, allowing computing providers to maintain pricing power and cash in handsomely. CoreWeave, Inc. told analysts that it raised computing prices by 25% in July, and recent contracts have locked in significant margin improvements. This is certainly a good sign.
But CoreWeave, Inc.'s debt structure casts a shadow over this optimism. Most of its borrowings are backed by multi-year customer contracts, which provides a safety net for lenders, as the revenue from these contracts covers the company's high capital expenditures. At the same time, however, this means CoreWeave, Inc. is locked into long-term contracts that may become increasingly less favorable as computing prices surge. The company is trying to create some flexibility. A recent $2.6 billion leveraged loan was backed by customer contracts that end years before the debt matures. This allows CoreWeave, Inc. to take on more short-term orders, which are often more profitable.
SpaceX operates with almost no such constraints. After its own AI product, Grok, underperformed, Musk realized that SpaceX's vast computing resources could become a massive money-printing machine, and also tell a compelling investment story as the company prepares for a large-scale IPO. Deals with Anthropic and Alphabet Inc. alone are worth a combined $2.2 billion per month. SpaceX management told shareholders last week that the company's return on investment in AI is currently less than a year. Musk's customers are willing to pay a premium, partly because they can terminate contracts with just 90 days' notice. This exposes SpaceX to risk if AI demand weakens. But Musk can afford to gamble, as the company holds roughly $100 billion in cash post-IPO. Furthermore, SpaceX has committed to using only NVIDIA chips, and is expected to receive a "significant portion" of NVIDIA's GPU capacity next year.
Analyst Madison Rezaei of Bernstein, who compared SpaceX to an "elephant," called it "a very strong new cloud computing competitor." While she is more optimistic about CoreWeave, Inc.'s latest earnings, she also emphasized that Musk's powerful engineering capabilities should help SpaceX expand its computing capacity faster. SpaceX projects that by the end of 2026, its annualized revenue will reach $100 billion, although this figure is not entirely from AI computing. In comparison, CoreWeave, Inc. expects annualized sales of around $19 billion by the end of this year. By the end of 2027, SpaceX aims to increase its computing capacity to nearly 10 gigawatts, up from about 1.4 gigawatts currently.
Admittedly, Musk has a history of overpromising, and the premium pricing in the AI infrastructure sector cannot last forever. His grand vision could ultimately cost hundreds of billions of dollars, burning through massive amounts of cash. CoreWeave, Inc. points out that despite growing competition, it continues to enjoy rising demand, higher prices, and expanding margins. With a backlog of over $100 billion in contract revenue, its strength is not to be underestimated. The market's reward for CoreWeave, Inc.'s performance is well-deserved. But as for Musk as a competitor, he is still worth watching closely.
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