Just last week I was on the call with a a techy architect from one of the major-major financial services companies, and he was discussing getting token capacity and his words on third best option was "we'd get it from Coreweave or whoever is still alive". So yeah, I am pretty sure that if that's the sentiment from software people at the major-major financial company, Coreweave is cooked.
This is how all capital-intensive utilities operate. The marginal cost of using a little more power or tokens is easy to justify because you can at any point stop using more.
But the cost to add more power capacity is huge and highly variable. Just because oil is expensive today doesn’t mean the capex to pump more is justified.
Really what AI needs is large customers that will commit to large spend over the next 5-10 years. Without this AI companies are basically offering duration arbitrage of electricity. Not a good place to be; the finances will always look bad.
Unfortunately, the amount of capital required by the entire AI industry is enough that counterparty risk is now a concern.
The money is there but not at the risk levels these companies have pushed things to. They're spending billions like it's candy, and treating millions like change they found in their couch cushions.
Financial systems are usually in the hands of people that have some risk management. When these labs say things like this will change everything, there's no way to know how to evaluate any of this.
Hyperscalers and SPVs are still planning on accelerating the buildout in 2027. Also even if everything hit the fan tomorrow, it will take time for production to shift back into consumer products if that's even what companies decide to shift to.
Aside from the price signal, the fact they were issuing these at a 9.625% coupon rate continues to run up their future debt servicing costs.
Coreweave doesnt seem to be in a winner-take-all sector, they have a narrow moat and will have high ongoing capex. I struggle to see how they dont go under eventually even with the ability to restructure debt
That’s edging up on credit card rates for strong borrowers wild. NerdWallet has Chase Freedom with a lower bound of 18.49% and Citi Diamond Preferred with 16.74%.
The yield is bounded from below by the treasury yield, which is just a little lower - and with the treasury you have really big problems if they default! But realistically the US will inflate its currency rather than default, so the yield is really just reflecting expected future inflation. It’s not as great a deal as it seems. Bonds are probably the most fairly priced assets in the world.
Fair could be construed as "the layers of market participants receive a share of the profits" . As far as I can tell there is essentially none left, and thats because folks will bid it down to 0 profit because they're lending others' money. (they're only responsible for their opportunity cost, but even 1% on others money is a good deal for the bank)
The treasury is having daily rates of 4.56% at 2 year bond and 4.88% at 10 years rate.
Yes, Google has a very small risk but still it is a non zero risk that google can bankrupt whereas US govt can physically not bankrupt itself given that it can print the money (there could only be some gridlock within raising the ceiling though but that's true)
Also I would argue that Google itself has changed with trillions of dollars spent into AI/Datacenters, it simply can't pivot as well. There is a reason as to why Google is having such high level of interest rate
Google isn't stupid and wants to give such high level of interests if not for the amount of risk involved. I dont believe that there's free lunch but also that perhaps this can be a good deal to some and this is gonna push people even more away from the more riskier neoclouds funding and cause their debts to rise in interests rate even more.
Matt Levine once noticed that Microsoft’s bonds were actually cheaper than Treasuries (during a time of Trump-instigated turbulence).
His point was that Microsoft has an interest in maximizing its credit worthiness which necessitated the corporate governance etc, while the administration had an interest in maximizing… other stuff (?) which did not necessitate the same things.
- No one has available tokens/gpus/datacenter for sale at any price
- No one will lend people money to build it
But the cost to add more power capacity is huge and highly variable. Just because oil is expensive today doesn’t mean the capex to pump more is justified.
Really what AI needs is large customers that will commit to large spend over the next 5-10 years. Without this AI companies are basically offering duration arbitrage of electricity. Not a good place to be; the finances will always look bad.
Unfortunately, the amount of capital required by the entire AI industry is enough that counterparty risk is now a concern.
The money is there but not at the risk levels these companies have pushed things to. They're spending billions like it's candy, and treating millions like change they found in their couch cushions.
Financial systems are usually in the hands of people that have some risk management. When these labs say things like this will change everything, there's no way to know how to evaluate any of this.
Coreweave doesnt seem to be in a winner-take-all sector, they have a narrow moat and will have high ongoing capex. I struggle to see how they dont go under eventually even with the ability to restructure debt
https://www.nerdwallet.com/credit-cards/best
That's a great return for practically zero risk.
(If google defaults on bonds there's much bigger problems in the world than the loss of your capital)
That being said, inflation is at 3.7% YoY and it's the real rate that maters, not the nominal one.
Yes, Google has a very small risk but still it is a non zero risk that google can bankrupt whereas US govt can physically not bankrupt itself given that it can print the money (there could only be some gridlock within raising the ceiling though but that's true)
Also I would argue that Google itself has changed with trillions of dollars spent into AI/Datacenters, it simply can't pivot as well. There is a reason as to why Google is having such high level of interest rate
Google isn't stupid and wants to give such high level of interests if not for the amount of risk involved. I dont believe that there's free lunch but also that perhaps this can be a good deal to some and this is gonna push people even more away from the more riskier neoclouds funding and cause their debts to rise in interests rate even more.
His point was that Microsoft has an interest in maximizing its credit worthiness which necessitated the corporate governance etc, while the administration had an interest in maximizing… other stuff (?) which did not necessitate the same things.
[1] https://www.wsj.com/finance/investing/why-microsoft-has-lowe...