CoreWeave's bonds, issued in June with a yield of 9.675 per cent, blew out to 15 per cent and now trade at less than 80 per cent of their face value. Other neoclouds, companies built specifically to provide computing power to train AI models, suffered similar hits to their shares and bonds. Earlier this month, data centre operator Firmus withdrew what would have been Australia's second-largest initial public offering after investors balked at its $44 billion valuation.
The selling accelerated after US data showed inflation rising again, pointing to higher interest rates that increase the cost of funding AI infrastructure.
Neoclouds commit to building or leasing data centres and installing the massive computing power AI requires, using contracts to rent that capacity to AI frontier labs and hyperscalers as backing for the equity and debt they raise. CoreWeave has committed to buying billions of dollars of high-end Nvidia graphics processing units. Nvidia has invested $US2 billion in the company and committed $US6.3 billion to buy any unsold capacity through to 2032, a feature often described as "circular" financing. OpenAI has committed to pay more than $US22 billion for compute and taken a $US350 million equity stake, with another contract in place with Meta. CoreWeave now carries more than $US40 billion in debt and leases.
The risks are mounting: long-term commitments to landlords sit against short-term subleases to customers, the rapid pace of GPU development could make installed chips obsolete, and community backlash plus inflation have made data centres slower and more expensive to build.
Research firm Gartner concluded last month that AI companies will not generate enough revenue to cover expected infrastructure spending. It forecasts nearly $US1 trillion in AI infrastructure spending this year and another $US6 trillion by 2030, against an estimated revenue need of $US8.5 trillion to cover costs and deliver a 12 per cent return. Gartner sees AI data centre revenues of only $US3.6 trillion through to 2032 and predicts more than 80 per cent of neocloud operators will cease operating independently by 2030.
CoreWeave's June quarter results underscore the gap: revenue of $US2.6 billion against capital expenditure of $US9.4 billion, a $US626 million loss and negative free cash flow of $US5.74 billion. Credit default swaps now cost almost $US1.2 million to insure $US10 million of its debt, pricing in a more than 60 per cent chance of default within five years.
CoreWeave chief executive Mike Intrator says markets are acting "irrationally" and he has confidence in the business model. Nvidia's share price has also fallen more than 10 per cent in the past fortnight.
Senior business columnist Stephen Bartholomeusz argues the sector's confidence depends on investors' willingness to keep supplying capital to close the widening gap between cash generation and spending. If that supply were throttled, he warns, it would be destructive for many companies with AI exposure, with the strongest hyperscalers the likely exception. The experience of the 19th century railways boom and the dot-com era shows AI could transform the world and still be a poor investment, he notes.