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.
CoreWeaveIt is (CRWV -11.91%) the stock 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.
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.
Image source: The Motley Fool.
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.
CRWV CoreWeave
$61.39-$8.30 (-11.91%)
NASDAQ · At 4 p.m. ET on 10/16/26
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.
“The era of easy money, which we experienced in the first nine months of the year, is starting to fade and dissipate,” said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute, said, according to CNBC. “Now there will be more scrutiny on the extra dollar or the marginal dollar and the concessions that the issuer gives you.”
Will the music stop?
The difficult part of evaluating an AI stock right now is whether the proverbial music that keeps the AI party going will stop.
At the end of the second quarter, CoreWeave reported a revenue backlog of more than $104 billion, with 40% expected to materialize within 24 months. In a note, CoreWeave CEO Mike Intrator wrote: “We are confident in our backlog, which more than supports all of our debts. »
According to Visible Alpha, CoreWeave analyst draft consensus estimates will significantly increase adjusted EBITDA to nearly $16.9 billion in 2027 and then to over $27.6 billion in 2028. So if current commitments with AI customers are met, then CoreWeave will be fine.
There are risks. For example, Fitch Ratings noted in June that 65% of CoreWeave’s first-quarter revenue came from its top two customers, although the company has since added more customers. But if those customers, for whatever reason, run into issues, CoreWeave will feel them.
Pioneering AI models currently have many data center commitments, but are still losing a lot of money. Even hyperscalers, after committing hundreds of billions to AI infrastructure, began generating negative free cash flow.
CoreWeave is already heavily leveraged, so if there is real stress in the AI business, it doesn’t have a fortress balance sheet to protect it. This is why it is one of the riskier stocks in the AI sector than, for example, hyperscalers like Microsoft.
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