CoreWeave’s Debt Crisis Signals Risks Across the AI Buildup

Is anyone else hearing that ominous ticking sound?

CoreWeave experienced a turbulent week last week. Its bonds slipped into distressed territory by a common standard—specifically when investors demand 1,000 basis points more in yield than they would receive from government bonds. Last Tuesday, Chamath Palihapitiya, known as the "SPAC King," noticed this distressed debt and also questioned whether the rapid AI buildout represents a private credit bubble. Since Tuesday's close, the company's shares have dropped by more than 20 percent, which is a significant decline. This volatility even caused collateral damage in the market for other AI companies.

I have previously questioned if the AI industry is a bubble, but when the SPAC King echoes concerns raised by a lady whose ongoing question about AI is "How are we planning on affording this, champs?", it sends a very different signal. When I say "yikes," it is one thing; when Elon Musk says it, the stakes are raised.

Compounding the difficulties for CoreWeave, Brannin McBee, one of the company's co-founders, told the Financial Times—also last week, on the same day as Palihapitiya’s post—that the company aims to achieve investment-grade debt status rather than junk status. This upgrade would allow CoreWeave to borrow from insurers, whose capital McBee described as "unlimited." While this is not entirely unreasonable—CoreWeave secured its first investment-grade chip loan earlier this year—it creates anxiety among investors who fear that CoreWeave, already a massive debtor, intends to borrow even more.

"The problem is not that credit profiles have changed in the last year, it’s that we’ve got another year and a half of supply coming," Bloomberg quoted John Yovanovic, co-head of leveraged finance at MetLife Investment Management, as stating.

I have seen some suggest that this indicates the AI bubble is bursting. I am not entirely convinced. A plummeting stock price does not necessarily signal financial doom. Stocks are a reflection of confidence in a company's future, not a daily business metric. However, CoreWeave holds a substantial amount of expensive debt, and if that debt becomes more costly, it makes it even harder for the company to turn a profit.

CoreWeave serves as the poster child for AI debt, possessing more than $35 billion in obligations as of its second-quarter earnings. This is partly due to pioneering the use of GPUs as collateral for loans and partly because CoreWeave lacks a traditional sustainable business model beyond selling compute; the company lost over a billion dollars in the first half of the year.

So why am I hesitant to declare victory? The answer lies in the "remaining performance obligations" from its customers, totaling $103.7 billion as of the second quarter. Approximately 40 percent of this amount is due to CoreWeave in 2028, and the companies that have signed these contracts cannot cancel them except under very limited circumstances. Its largest customers are Microsoft, OpenAI, and what is likely Nvidia, though CoreWeave does not disclose the identity of its third-largest customer. These three entities generated nearly three-quarters of the company's second-quarter revenue.

Microsoft and Nvidia are likely reliable payers—at least, as long as it benefits them to be. I suspect they realize that if CoreWeave goes under, there will be significant collateral damage in the market, so they are unlikely to force the company into insolvency. OpenAI presents a riskier scenario, but assuming OpenAI is not in significantly more financial distress than we perceive, CoreWeave should remain stable for a while. As long as the company can continue servicing its debt, the momentum continues. Only when the AI boom falters will we discover if the underlying business is actually viable.

Despite this, anxiety around CoreWeave has destabilized other companies that have taken on significant debt during the AI buildout; for example, Oracle shares have fallen nearly 10 percent over the same period, and there has been a sell-off in Oracle bonds. The concerns investors harbor about CoreWeave are, in fact, prevalent across all neoclouds, casting doubt on whether the bare-metal business model is sustainable.

Nevertheless, some investors are choosing to buy the dip.