It's getting more expensive for investors to buy protection against a CoreWeave default
CoreWeave's stock was extending its decline Thursday.
Investors are rethinking the risks associated with funding CoreWeave's enormous artificial-intelligence spending - and the company's bonds and stock are both under pressure.
CoreWeave is in a precarious spot, with the $2.75 billion of 9.75% bonds that the company issued in April trading at 79.5 cents on the dollar on Wednesday to yield more than 15%, according to data provided by BondCliQ.
Meanwhile, shares of CoreWeave (CRWV) were down more than 2% on Thursday, sliding for the 4th session in a row and bringing their losses to nearly 22% over that span.
CoreWeave has built a business model around renting out Nvidia's (NVDA) graphics processing units and supplying AI labs like OpenAI and Big Tech companies like Meta Platforms (META) with computing power. The company operates data centers across the U.S. and globally.
CoreWeave relies heavily on debt to fund its infrastructure purchases, Bernstein analyst Madison Rezaei explained in a Thursday note. That debt is coming into focus in an environment where investors are getting more worried about the costs of borrowing money and the sustainability of AI spending going forward.
Rezaei, who is cautious on CoreWeave's stock, said the company has a "wildly capital-intensive business," meaning that it needs to spend money to drive growth.
"The GPUs are spendy, the cash goes out well before the customer payments come in, and rapid growth compounds the funding gap," she wrote. Rezaei pointed to the fact that in the June quarter, CoreWeave generated $679 million in operating cash flow - the cash the company generated from its business activities - while also recording $9.4 billion of capital spending.
Tech companies have been flooding the market with both investment-grade and high-yield bonds to fund AI spending. But the cost of protecting CoreWeave's debt against default for five years increased to almost 881 basis points on Monday, up from around 547 basis points at the end of June, according to Dow Jones Market Data. That's based on credit-default swaps - derivative contracts that investors buy to hedge against against default risk. They become more expensive when investors believe the likelihood of default is rising.
A major concern for CoreWeave is that it heavily relies on credit guarantees from customers, Seaport analyst Jay Goldberg wrote in a Thursday note. He also said lengthy construction schedules could hinder the company's ability to hit some of its benchmarks, like deploying over 3 gigawatts of power by the end of 2027.
Goldberg wrote that the AI trade is becoming increasingly fragile, reflecting worries about OpenAI and Anthropic's financing and their potential to generate real returns. That, along with its bond yields hitting 15%, are driving a "delayed recognition" of CoreWeave's debt challenges, he said.
On top of that, CoreWeave CFO Nitin Agrawal disclosed in a Wednesday filing his recent sale of about $1.8 million worth of the company's shares at prices near $80. The sales were conducted on Monday via a Rule 10b5-1 trading plan, which is a program that allows corporate insiders to arrange for preset sales based on certain conditions. CoreWeave shares were trading Thursday morning at around $64.
CoreWeave did not immediately respond to a request for comment on Thursday, though a company spokesperson told MarketWatch on Wednesday that it is confident that its revenue backlog "supports all of our debt obligations." That revenue backlog - or contracted, unrealized revenue - reached roughly $104 billion at the end of the June quarter, which gives the company "substantial visibility into future revenue," the spokesperson said.
Analysts at Citrini Research wrote in a Thursday note that while "it's possible CoreWeave could go belly-up, there's an opportunity in the debt" - pointing out that the company has a market capitalization of $36.3 billion while its debt stands at $36.6 billion. That means bondholders would be repaid in full if CoreWeave lost roughly half its value, since debt holders get paid before equity holders, the Citrini analysts noted.
Given the bonds' 15% yield, "it's either going to be a great investment or the entire AI complex is at risk of a rug-pull," they wrote.
See also: The murky AI milestone that has some of the industry's leading voices increasingly on edge
-Hannah Pedone
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