RPT-BREAKINGVIEWS-CoreWeave scripts AI’s Tinker Bell moment

By Robert Cyran

NEW YORK, March 27 (Reuters Breakingviews) - CoreWeave is the Tinker Bell of the artificial intelligence trade. Like the fairy from "Peter Pan", it is capable of soaring flight, growing revenue eightfold last year to $1.9 billion. Yet as the story goes, it requires belief to stay aloft. The primary suspension of doubt: that dependence on one supplier and one customer does not matter. As the company struggles to conclude an initial public offering, cutting its valuation target by 22% from the middle of an earlier range to $23 billion according to a Reuters report, CoreWeave may challenge the faith undergirding the AI boom.

Chief Executive Michael Intrator has a few key counterparties. Technology titan Microsoft MSFT.O accounted for 62% of revenue last year. To feed its appetite, CoreWeave amassed 250,000 graphics processing units from chipmaker Nvidia NVDA.O, the standard for AI computation. Funding this left the company carrying $8 billion of outstanding debt.

Just keeping pace is difficult. Chips get more powerful with every generation, reducing old silicon’s value. But CoreWeave uses GPUs as collateral, agreeing to high rates and fast repayment to lenders like Magnetar Capital, which also holds a 30% stake. CoreWeave owes over $7 billion of interest and principal repayments over the next two years. IPO funds and cash from existing contracts should cover it. The future is less certain.

CoreWeave’s best customer is pulling back. Microsoft-backed OpenAI has stepped in with a five-year, $12 billion contract. Still, for debt to support capacity for "specified" investment-grade customers, CoreWeave pays Magnetar a roughly 10% interest rate. That rises to 17% for junk-rated clients. Meanwhile, OpenAI says it won’t become cash flow positive until 2029, when in anticipates $125 billion of annual revenue, some 10 times expected 2025 sales. Its dependability rests on boss Sam Altman’s ability to continue raising vast sums of capital to incinerate. He’s close to a gigantic $40 billion round led by SoftBank 9984.T, Bloomberg reported - including participation from Magnetar.

This is CoreWeave’s real test: whether it can sustain belief in this circular silicon economy. After all, stepping outside of it to service clients without Microsoft’s AAA credit rating would be expensive. This concern will affect the entire AI boom, as mutual back-scratching agreements are pervasive.

Consider Nvidia, whose market value has grown ten-fold since ChatGPT began the AI scramble in 2022. It, too, depends on a few big customers’ budgets. It is even stepping in to support CoreWeave’s IPO with a $250 million investment, Reuters reported, on top of the near-6% it already holds. In effect, the $2.8 trillion Goliath is financing a large buyer of its GPUs.

Doubts about overcapacity are rising, and where the ultimate value in AI will actually be generated is still unclear. A CoreWeave stumble risks shaking AI investors’ fairytale flights of fancy.

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CONTEXT NEWS

CoreWeave slashed the proposed price range and number of shares to be sold in its planned initial public offering, Reuters reported on March 27, citing a source familiar with the matter.

The provider of cloud computing services powered largely by graphics processing units from chipmaker Nvidia plans to sell 37.5 million shares at $40 each. It had previously sought to sell 49 million shares at a price of between $47 and $55.

Nvidia will buy up to $250 million shares at the $40 price, Reuters also reported. The company owns a 6% stake in CoreWeave, which has bought over 250,000 of its GPUs.