Are we starting to see cracks in the AI trade?
For the past several years, investors have been willing to pour enormous amounts of money into AI, betting that the technology will transform industries, increase productivity, and generate extraordinary profits. However, there's a growing problem emerging beneath the excitement. How much debt can companies take on before the promise of AI becomes a financial liability?
The latest warning sign is CoreWeave, an AI infrastructure company whose borrowing costs and credit default swap spreads have surged as investors reassess the risks of financing the AI boom. According to CNBC's October 15 report, CoreWeave has accumulated more than $51 billion in debt and other obligations to finance its expansion. Its five-year credit default swap spreads briefly climbed above 1,140 basis points, while the yield on its 2031 bonds reached approximately 15.8%. These are signs of serious credit-market concern, not the conditions investors typically associate with a financially comfortable growth company.
There is a difference between AI demand and AI profitability. The demand for AI is real. Companies are investing heavily in computing capacity, data centers, advanced chips, and the infrastructure needed to run increasingly sophisticated AI models. CoreWeave provides specialized cloud computing infrastructure for customers that need access to powerful GPUs without building all their own computing facilities. The business has secured substantial customer commitments, including contracts with major technology companies. Let it be known that there is a critical distinction between having customers and generating enough cash to pay for the infrastructure required to serve them. Building data centers and acquiring computing equipment requires enormous upfront investment. Debt must be serviced, facilities must be brought online, and operating costs must be covered before the business can deliver an adequate return on the capital invested.
CoreWeave's reported backlog exceeds $100 billion. That is a significant number, but a backlog is not the same as cash in the bank. Revenue must be delivered over time, operating expenses must be paid, and the economics of those contracts must ultimately justify the investment. Stock investors often focus on revenue growth, market share, and future potential. Credit investors have a different priority and that is getting their money back. When bond prices fall and yields rise sharply, borrowing becomes more expensive and refinancing existing obligations can become more difficult. Credit default swaps provide another indication of how investors perceive a company's risk of default. CoreWeave's credit default swap spreads have moved into territory associated with significant financial distress. This has me worried about the state of the stock market and we saw some of the pressure ealier this week...