Under the test of debt, CoreWeave (CRWV.US) may fall for four days in a row Wall Street debates whether this round of sell-off is “seriously excessive”

The Zhitong Finance App learned that US stocks fell more than 2% before the market on Thursday for artificial intelligence (AI) cloud computing company CoreWeave (CRWV.US), which has been tested by debt. If this downward trend continues until today's close, the stock will close down for the fourth consecutive trading day. However, Wall Street analysts are still divided on whether the stock has recently experienced excessive sell-off.

CoreWeave's business model relies heavily on investing huge sums of money in advance, purchasing AI chips and building computing power infrastructure, and then leasing computing resources to customers. But the new cloud service provider's huge debt has alerted investors — CoreWeave's total debt increased 221% year over year to $72 billion last quarter, according to Fiscal AI data.

According to reports, the price of CoreWeave's unsecured bonds due in 2032 fell below 80 cents, and this level is generally regarded as the threshold for financial stress to occur. According to Dow Jones market data, CoreWeave's five-year credit default swap (CDS) cost has risen to about 881 basis points, which means that the probability of market pricing default is over 50% within five years. Furthermore, a bond issued by CoreWeave in June this year had a yield of 9.625% at the time of issuance. Recently, the yield has risen to about 15%, reflecting investors' demand for higher risk compensation.

Multiple factors, such as inflationary pressure and fiscal concerns, have boosted US bond yields, and investors' concerns about CoreWeave facing higher financing pressure continue to increase. Investors are also concerned about whether huge computing power investments can ultimately generate sufficient revenue and cash flow to cover rising construction and financing costs.

However, CoreWeave management had a different opinion on the market reaction. According to reports, CoreWeave CEO Mike Intrator believes in an internal memo that the market reaction was irrational. In his memo, he told employees: “We are confident in our business model, our customers, our superior quality of execution, and the strict discipline that has been maintained around our financial engine.”

Has the sell-off been excessive? Wall Street is still divided

Freedom Capital Markets analyst Jordan Chalfin pointed out that CoreWeave currently has about 40 billion US dollars in debt, and consistent market expectations show that the company's spending over the next three and a half years is about 80 billion US dollars. With the yield on its unsecured bonds approaching 16%, “it is becoming increasingly difficult to finance its ambitious growth plans.”

In addition to financing challenges, CoreWeave also faces the risk of overconstruction. Jordan Chalfin said that CoreWeave currently has about 1.5 gigawatts of active power capacity and plans to expand this scale to more than 8 gigawatts by 2030. In his view, if demand weakens, the company may face overcapacity and heavy debt burdens.

Additionally, Jordan Chalfin pointed out that CoreWeave's initial customer contract will expire after five years, and major customers such as Microsoft (MSFT.US) and Meta Platforms (META.US) may eventually choose to build or lease more computing power themselves rather than renew their agreement with the company. He added that he preferred Oracle (ORCL.US) over CoreWeave because the latter is an investment-grade stock and has lower operating expenses compared to sales.

However, Creditsights analyst Paul Meeks is still optimistic about CoreWeave, citing strong fundamental growth in the company. Paul Meeks once suggested buying CoreWeave when its stock price was over $70, and said that the recent sell-off had gone too far. “I do think credit investors and stock holders have seriously exaggerated the magnitude of this decline,” he said.

Paul Meeks added that its model expects CoreWeave's revenue to grow from about $5 billion in 2025 to $43 billion in 2028, while profit before interest, tax, depreciation and amortization (EBITDA) will reach $29 billion. This means that the EBITDA margin will reach 67%, while his model predicts an operating margin of 16%.

However, Paul Meeks said he is more concerned about construction risks compared to recent financing. He also pointed out that concerns in the credit market may spread to the stock market, and even if there are differences in the individual business prospects of different companies in the new cloud sector, it may cause the stock prices of companies in the entire sector to fall.

Deutsche Bank also believes that the recent decline in CoreWeave's stock price has been too large. The bank maintained a “buy” rating for CoreWeave and a target price of $150 in a report to investors. Analyst Brad Zelnick said in the report: “A combination of factors appears to have caused CoreWeave's public stock and debt to experience a sharp sell-off in the past week. There is no doubt that the future of Coreweave is closely linked to the success of AI and the demand for the underlying computing infrastructure that supports AI, so the company's stock price should reflect changes in market sentiment in this field. Other than that, it's hard for us to find company-specific factors that explain recent stock price trends.”