CoreWeave is expected to have a gross leverage ratio of 6.3x by the end of the year. The market is worried about Neocloud’s balance sheet.
Investor concerns are starting to weigh on some AI stocks, particularly those that trade at high valuations and lack strong balance sheets to navigate what could become a very difficult environment if funding dries up and the AI business hits a snag.
CoreWeaveShares of (NASDAQ: CRWV) plunged nearly 15.5% on October 14 due to these concerns. The neocloud player has taken on debt to build data centers to fuel the AI revolution. However, soaring bond yields have driven up the cost of capital, leading investors to increasingly believe that the capital markets for these AI stories could potentially freeze, or at least make it more difficult to raise funds.
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CoreWeave is expected to have a gross leverage ratio of 6.3x by the end of the year, raising market questions about the company’s balance sheet.
The ‘Era of Easy Money’ May Be Coming to an End
CoreWeave was one of the most notable early neoclouds that began building data centers specifically for the hyperscalers driving the AI revolution. Key customers include MicrosoftOpenAI, Metaplatforms, Nvidiaand Anthropic.
In just a few years, the company has brought 51 active data centers online that can collectively provide 1.5 gigawatts (GW) of computing. The company added eight data centers this year and had contracted about 4.2 GW of total power as of August 11.
The problem is that building these data centers is extremely capital intensive, forcing the company to take on significant debt to finance construction. At the end of the second quarter, the company had generated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of almost $2.7 billion. Meanwhile, total debt stood at $27.6 billion, compared to about $5 billion in total equity.
Looking ahead, Wall Street analysts predict that CoreWeave will significantly increase its debt to $47.6 billion by the end of 2026, according to Visible Alpha. Projected adjusted EBITDA is expected to reach approximately $7.6 billion by the end of the year, which would give the company a gross leverage ratio of nearly 6.3x.
The situation, coupled with a higher rate environment, led investors to sell CoreWeave bonds. For example, according to Barron’sCoreWeave’s 9.625% senior unsecured notes due 2032 fell below $80 as of October 14. Bonds are typically valued at par ($100) and have an inverse relationship with bond yields.
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