CoreWeave’s Selloff and the AI Economy

SPEAKER_1 (0:02)

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Katherine Schwartz (0:09)

There's a lot of factors that are creating this perfect storm for why the market was so reactive. Investors are already showing a lot of fatigue around these data center deals and the amount of capital that they require.

And we're seeing a lot of that investor FOMO be replaced with skepticism.

Dina Bass (0:27)

It's possible that by next week this will have blown over. It'll be fine. CoreWeave will be stable and some other company will be raising questions or nobody will be. I think what's clear in any of these sorts of boom periods is that there's no situation in which all these companies make it.

Sarah Holder (0:46)

I'm Sarah Holder and this is the Big Take from Bloomberg News. Today on the show, I sit down with Bloomberg's Katherine Schwartz, who covers credit, and Dina Bass, who covers AI infrastructure, to talk about the CoreWeave sell-off, what it means for Neo Clouds and the future of the AI build-out.

So the big story in AI right now is what's going on with a company called CoreWeave. It saw its stocks plummet as much as 17 percent last Wednesday. By the end of the week, it was down a total of 23.5 percent since the beginning of last week. Katherine, what happened?

Katherine Schwartz (1:26)

One main catalyst is that the company's co-founder said that CoreWeave was exploring ways to borrow in investment-grade markets and explore those pools of capital, which is basically creating a lot of lender concerns that the company is planning to borrow more at a time when there are already concerns about its leverage and debt capacity.

Dina Bass (1:45)

CoreWeave is part and was the original company in this category that people love to call Neo Clouds. CoreWeave hates that title, partly because they feel that they're not a new cloud anymore. They've been selling this kind of AI capacity for seven, eight years now, predating ChatGPT to be clear, and so they feel like the new part is a little weird. They're also trying to get out of people thinking of them purely as somebody you can go to for GPU capacity. They're trying to sell a lot more software and cloud services on top of it. Things like that are more profitable.

The reason we're talking about CoreWeave debt is because every time they want to get another data center up and running that they can sell capacity in, they end up having to borrow quite a bit to do that. It's pretty capital intensive.

Sarah Holder (2:32)

Dina, what is a NeoCloud? What role do NeoClouds like CoreWeave serve in the AI space?

Dina Bass (2:40)

They're really AI focused clouds. So when you think back to the history of cloud computing and the companies that most of us think about, Amazon Web Services, Microsoft Azure, Google Cloud Platform, those are companies that started in an era that was pre-generative AI.

They were selling cloud services to fuel all things, like your email, your accounting system, and more recently, they've been selling AI services. But they do cloud computing for all different workloads and tasks. The NeoClouds for the most part are AI clouds. They're focused around providing computing on top of NVIDIA GPUs which are chips that get used for AI. Really, this whole industry grew up around how do you get customers enough NVIDIA GPUs that they can train and then run their models.

Sarah Holder (3:31)

Katherine was describing the perfect storm for CoreWeave, why its stock was plummeting, why it's moving into distress territory. But how are other companies in the category fairing right now? How does CoreWeave stack up?

Katherine Schwartz (3:43)

Yeah, I would say kind of building off of what Dina said, there is a lot of fear, first of all, tied into these NeoClouds because for one reason, they also tend to be younger companies with higher yield ratings. So some of the losses on CoreWeave's debt kind of undermines some of the appetite for the NeoCloud model itself. And something that we're hearing from investors is for a NeoCloud deal to clear the market right now, it's going to be really difficult or even prohibitively expensive. So for one, there's a lot of concentration of fears around NeoCloud, but there's so much issuance or oversupply in the market, and that's outweighing investor demand. And the result of that is basically, one, you have so much kind of investor fatigue now around some of these data center financings, so I think that's where a lot of the tension is residing right now.

Sarah Holder (4:29)

Right. So it's not just a CoreWeave problem, it's not just a NeoCloud problem, it's a problem that a lot of these AI companies are building this infrastructure on corporate debt, and the corporate debt market is saying, oh.