A Neocloud’s Gathering Storm
Whenever I’m the slightest bit ill, I take to my bed and mope. If it goes more than a day or so, I assume the worst—that the end is nigh. I can’t honestly remember the last time I felt unwell for more than a couple days, but I imagine such a scenario would probably find me consulting ChatGPT about burial shrouds.
So I’d like to extend a smidgen of sympathy to CoreWeave CEO Mike Intrator. Surely, he’s been feeling poorly for nearly two weeks!
In the last 12 days, CoreWeave’s stock has been nearly halved. A confluence of factors has contributed to the rampant decline, as my colleague Dakin Campbell explained. In short, investors are worried about how rising interest rates will affect CoreWeave’s ability to raise debt, which it needs to fund its business of selling cloud computing services. They’re also concerned about whether CoreWeave can handle the costs of the mound of debt it already has.
Last week, fresh data on U.S. inflation fueled interest rate concerns: Inflation jumped in September, increasing the odds that the Federal Reserve will hike interest rates—making all debt more expensive.
Even though there was no new inflation data this week, CoreWeave shares continued to fall—from around $60 on Monday to roughly $54 on Friday. Not even Nvidia’s all-powerful CEO, Jensen Huang, was able to stanch the bleeding when he tried to sound a note of confidence for CoreWeave on Thursday, saying the demand for companies like CoreWeave—neoclouds—is “off the charts.”
The stock nerds over at Barron’s tried to argue that Wednesday’s earnings report from SpaceX is actually a good sign for CoreWeave. Those numbers showed surging demand for SpaceX’s nascent business of selling its excess AI compute, but I’m not sure whether that necessarily bodes well for the company. Yes, an indicator of demand for compute could be interpreted as a welcome data point for CoreWeave, a compute seller. But SpaceX’s compute business increasingly seems like a real competitor to CoreWeave and other neoclouds, and as the much, much better established company, SpaceX has the resources to fund expansion of its compute-selling efforts without acquiring hazardous amounts of debt. And investors are a great deal less likely to sink its stock price over interest rate jitters.
More news from Wednesday highlighted the industry’s appetite for compute. Meta Platforms said it will create a new share class in January—essentially a two-for-one stock split—that will allow it to reach for more capital to spend on AI. It’s also partly a maneuver that would help CEO Mark Zuckerberg pay off California’s billionaire tax if the levy is approved next month. Meta’s board justified helping Zuck pay his taxes by saying that the CEO had threatened to pick up sticks and leave California—and that it was essential to have him in the office as much as possible. (I had to laugh. Just a couple years ago, Zuckerberg was telling us the metaverse would arrive soon, and we’d all be living as digital stick things. Such was the potential of the metaverse that Zuckerberg renamed his entire company for it. Well, guess not!)
More capital at Meta might be good for CoreWeave. Meta is a CoreWeave customer—to the tune of $35 billion. There’s no guarantee, of course, that Meta will take a newfound gusher of capital and go back to CoreWeave again. Recently, Meta has been building its own data centers and readying production of its custom AI chips. It has also considered selling compute.
Investors looked on wearily at Meta’s stock split/potential Zuck gift, with the company’s shares dropping nearly 9% on Thursday. In fact, Meta’s moves unnerved the entire market yet again over how much this whole AI thing will cost. The Nasdaq sank 2.6% on Thursday. CoreWeave shares fell 10%, while declines also hit Nebius (down 7.2%) and IREN (8.3%), the two other publicly traded neoclouds. And everything kept falling on Friday.
Are all the stock moves based on buttoned-up rationality? No. But like the common cold that I’m always certain will put me six feet under, worry on Wall Street is contagious.