Analysts argue CoreWeave’s underlying economics are far sturdier than nervous debt and equity investors realize It’s been a tumultuous few months for shares of CoreWeave, which have fallen over 50% from their May highs. As the artificial-intelligence trade hit a fresh speed bump last week, the specialized cloud provider’s business model came under scrutiny yet again. But the extent of the selloff has prompted some analysts to rush to CoreWeave’s defense.
In a Monday note, Goldman Sachs analyst Gabriela Borges called CoreWeave’s setup a lesson in “Finance 101,” noting that the company’s valuation comes down to the spread between what it can charge for its chip-rental business and the company’s cost of capital, or what it costs for CoreWeave to borrow money and raise funds. Chip stocks have been on a wild ride. What comes next?Play video: Chip stocks have been on a wild ride.
CoreWeave has utilized a strategy of borrowing money to outfit data centers with the necessary hardware to run AI workloads, and then leasing out the cloud access to customers. Hotter-than-expected inflation data led CoreWeave shares and bonds to drop sharply last week, as investors worried that rising interest rates would increase CoreWeave’s borrowing costs. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it.
I would like to receive updates and special offers from Dow Jones and affiliates. I can unsubscribe at any time. However, Borges believes that investors may be “underestimating the magnitude of upward revisions” to the company’s rate of return on its hardware investments while “overestimating the magnitude of upward revisions” to the company’s cost of capital.
The current shortage of processing power on the market should increase the amount of revenue CoreWeave can earn per megawatt of power capacity over the next 24 months, Borges added. While CoreWeave’s future debt will likely come at a higher interest rate, Borges argues the increase will only amount to 100 to 200 basis points, capping the company’s blended borrowing costs at around 10%. A basis point is one hundredth of a percentage point, or 0.01%. **More:**CoreWeave’s polarizing stock rebounds as Wall Street squares off about AI spending “Our conversations with credit specialists suggest that CoreWeave should still be able to finance its future expansion plans at a cost of debt that is only modestly higher than its current weighted average cost of debt,” Borges wrote.
CoreWeave’s delayed-draw term loans are placed inside separate corporate vehicles and collateralized by physical hardware and guaranteed customer contracts, often from investment-grade names like Meta and Microsoft . The debt is designed to be paid down over the course of the contract. The key uncertainty for CoreWeave will be whether it can recontract those chips at attractive prices once initial agreements expire, Borges said.
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