CoreWeave shares tumble as bond yields near 15% on concern about AI borrowing binge

CoreWeave shares tumble as bond yields near 15% on concern about AI borrowing binge

On Wednesday, CoreWeave experienced significant declines in both its stock and bonds, as investor anxiety heightened regarding substantial borrowing by technology firms to support artificial intelligence infrastructure development.

The company's shares saw a sharp drop of 16%, coinciding with a rise in the yields on its debt. The yield to maturity on its 9.625% bond set to mature in 2032 reached 14.8%, while the yield on its 9.75% bond due in 2031 rose to approximately 14.9%. It is important to note that bond yields move inversely to bond prices.

While initial investor enthusiasm surrounding artificial intelligence investments had been strong, sentiment has notably shifted, according to Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute.

Now, investors are seeking additional compensation for risk, he indicated.

"The era of easy money, which we observed in the first nine months of the year, is beginning to wane," Alvarado remarked. "Investors are scrutinizing each additional dollar and the concessions being offered by issuers."

Prominent tech investor Chamath Palihapitiya, founder and CEO of investment firm Social Capital, highlighted CoreWeave's alarming yields on social media platform X late Tuesday, prompting a response from Tesla and SpaceX's Elon Musk, who remarked, "yikes."

Palihapitiya shared data illustrating that the yield on the 2032 bond "touched 15%" before "closing at a new high" on Tuesday. He further delved into the implications of the AI boom on the private credit market, noting the minimal additional costs lenders appear to charge for AI-related risk.

'Relatively bad' balance sheet

According to Paul Meeks, head of technology research at Freedom Capital Markets, CoreWeave's balance sheet is comparatively "relatively bad" when assessed alongside its neocloud counterparts, largely due to its increased borrowing and the ongoing construction of additional data centers.

"The yields have expanded because investors harbor growing concerns—concerns I do not share—about the company's ability to manage and repay its interest expenses over time," Meeks explained.

"While the situation is not deteriorating, it also has not shown signs of improvement, and I had not anticipated any progress until these data centers are operational."

Meeks projects that the company will report stable margins from June to September, anticipating a considerable margin improvement between September and December. CoreWeave is expected to release its next quarterly results in November.

Tech sector hit

CoreWeave is not alone in its struggles, as other technology companies are also feeling the impact of growing trepidations regarding debt levels associated with AI initiatives. For example, Oracle's shares fell nearly 7% on Wednesday, and its bond yields also increased, with the yield to maturity on its 6.25% bond due in November 2032 resting at 7.24%.

The broader tech sector contributed to a decline in the stock market on Wednesday, with the Nasdaq Composite Index dropping by 1.4%. The concerns surrounding debt appear to be disproportionately affecting the more vulnerable stocks outside of the so-called "Magnificent Seven."

Another neocloud company, Nebius, reported a decline of 9%.

Amidst a competitive race to develop AI infrastructure, companies have increasingly relied on the credit market to finance their projects, leading to a notable increase in supply. Dell saw a significant decrease of 10%.

Overall, analysis from JPMorgan indicates that hyperscalers are projected to invest $800 billion this year, with that figure expected to exceed $1 trillion annually by 2027.