CoreWeave (CRWV.US) May Be Headed for a Fourth Straight Decline Amid Debt Test as Wall Street Debates Whether the Selloff Is "Severely Overdone"

CoreWeave (CRWV.US), an artificial intelligence (AI) cloud computing company facing a debt test, fell more than 2% in Thursday's U.S. premarket trading. If this decline continues through today's close, the stock will post a fourth consecutive trading day of losses. Wall Street analysts remain divided over whether the stock has recently been oversold. CoreWeave's business model relies heavily on spending huge amounts of capital upfront to purchase AI chips and build computing infrastructure, then renting out computing resources to customers. But the new cloud service provider's massive debt has already raised investor alarmaccording to Fiscal AI data, CoreWeave's total liabilities rose 221% year over year last quarter to $72 billion. Reports said the price of CoreWeave's unsecured bonds maturing in 2032 fell below 80 cents, a level typically seen as a threshold indicating financial stress. Dow Jones Market Data showed that the cost of CoreWeave's five-year credit default swaps (CDS) has risen to about 881 basis points, meaning the market is pricing in a probability of default within five years of more than 50%. In addition, a bond CoreWeave issued in June this year with a yield of 9.625% at issuance has recently seen its yield rise to about 15%, reflecting investors' demands for higher risk compensation. Inflation pressures, fiscal concerns and multiple other factors have pushed up U.S. Treasury yields, intensifying investor worries that CoreWeave faces greater financing pressure. Investors are also focused on the question of whether massive computing investment can ultimately generate enough revenue and cash flow to cover rising construction and financing costs. However, CoreWeave management takes a different view of the market reaction. According to reports, CoreWeave Chief Executive Officer Mike Intrator argued in an internal memo that the market reaction is not rational. He told employees in the memo: "We are confident in our business model, our customers, the quality of our exceptional execution, and the strict discipline we maintain around the financial engine we have built." Has the selloff gone too far? Wall Street remains divided Freedom Capital Markets analyst Jordan Chalfin pointed out that CoreWeave currently has about $40 billion in debt, while consensus expectations show the company's spending over the next three and a half years will be about $80 billion. With yields on its unsecured bonds near 16%, "financing its ambitious growth plans is becoming increasingly difficult." In addition to financing challenges, CoreWeave also faces the risk of overbuilding. Jordan Chalfin said CoreWeave currently has about 1.5 gigawatts of active power capacity and plans to expand that to more than 8 gigawatts by 2030. In his view, if demand weakens, the company could face overcapacity as well as a heavy debt burden. In addition, Jordan Chalfin noted that CoreWeave's initial customer contracts will expire after five years, and major customers such as Microsoft Corporation (MSFT.US) and Meta Platforms (META.US) may ultimately choose to build or lease more computing capacity themselves rather than renew agreements with the company. He added that he prefers Oracle Corporation (ORCL.US) over CoreWeave because the former is an investment-grade stock and has lower operating expenses relative to sales. Still, Creditsights analyst Paul Meeks remains bullish on CoreWeave, citing the company's strong fundamental growth. Paul Meeks had recommended buying CoreWeave when its stock was in the $70s and said the recent selloff has gone too far. He said: "I do think both credit investors and equity holders have severely exaggerated the magnitude of this decline." Paul Meeks added that his model projects CoreWeave's revenue will grow from about $5 billion in 2025 to $43 billion in 2028, while EBITDA will reach $29 billion. That implies an EBITDA margin of 67%, while his model projects an operating margin of 16%. However, Paul Meeks said he is more concerned about construction risks than about recent financing. He also noted that concerns in the credit market could spill over into the stock market, potentially dragging down share prices across the neocloud sector even if individual business prospects differ among companies. Deutsche Bank Aktiengesellschaft also believes CoreWeave's recent share price decline has been too large. In a report to investors, the bank maintained its "Buy" rating on CoreWeave and a $150 price target. Analyst Brad Zelnick said in the report: "A combination of factors appears to have contributed to the sharp selloff in CoreWeave's public equity and debt over the past week. There is no doubt that CoreWeave's future is tied to the success of AI and demand for the underlying computing infrastructure that supports AI, so the company's share price should reflect changes in market sentiment in this area. Beyond that, it is difficult for us to find company-specific factors that can explain the recent share price action."