CoreWeave debt concerns: AI demand is strong, but can the data centre major's cash flow justify its spending? Explained

Investor concerns about debt financing for artificial intelligence (AI) infrastructure are spreading into technology stocks, with CoreWeave and other companies facing increased scrutiny over the financial risks of their expansion.

CoreWeave shares fell during trading on Thursday before recovering to close 5.94% higher. The move followed a 15.5% plunge on Wednesday. Other AI cloud companies, including Nebius and Iren, also came under pressure before recovering some or all of their losses.

Anxiety over AI overspending has also affected chipmakers. Micron Technology shares sold off following a sharp decline in South Korean chip stocks, before closing 1.87% higher. Advanced Micro Devices (AMD) fell 1.5%.

Quick answers to key questions

•5 QUESTIONS

1

Why are investors worried about CoreWeave's debt despite strong AI demand?⌵

Investors are questioning whether CoreWeave can generate enough operating cash flow to support its heavy spending on chips and data centres. Strong demand and customer contracts do not necessarily mean the business will produce cash quickly enough to cover its investment and financing costs.

2

Does CoreWeave's $100 billion-plus backlog cover its debt obligations?⌵

CoreWeave's CEO says the backlog more than supports the company's debt obligations, and much of it comes from investment-grade customers. Investors remain concerned, however, about whether the company can turn those commitments into cash flow to support its spending.

3

What does a 1,000-basis-point CDS spread mean for CoreWeave?⌵

A CDS is a contract that protects against the risk of a borrower failing to repay its debt. A spread around 1,000 basis points is generally considered a sign of credit distress and indicates that investors view CoreWeave's debt as riskier.

4

How could higher interest rates affect CoreWeave's AI data-centre expansion?⌵

Higher rates can raise borrowing costs and make it harder for CoreWeave to finance its large infrastructure investments. If financing becomes more expensive or less available, the company could face pressure to scale back expansion.

5

Should CoreWeave's strong contracts reassure investors about its financial risks?⌵

The contracts and backlog provide evidence of demand, but they do not by themselves resolve concerns about heavy spending and negative free cash flow. Investors are watching whether cash flow arrives in time to justify the company's investment and debt.

Investors have grown increasingly cautious about companies borrowing heavily to buy chips, build data centres and rent out computing power.

CoreWeave's credit default swaps (CDS) offer one indication of this stress. These contracts provide protection against the risk that a borrower fails to repay its debt. When CDS spreads widen, it indicates that investors view the debt as riskier.

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The Evercore ISI trading desk said the market was “basically saying ‘no mas’ to AI debt without operating cash flow support”.

A CDS spread of 1,000 basis points or above is generally a sign of credit distress, said Gavan Nolan, executive director of fixed income pricing at S&P Global Market Intelligence.

The concern is not whether demand for CoreWeave's services exists. The company has contracts with major hyperscalers. Instead, investors are questioning whether the business will generate sufficient cash flow to support its investments.

“It's obviously heavily negative free cash flow at the moment, and it needs that cash flow to arrive really to justify all the capex that it's spending,” Nolan said.

CoreWeave CEO Mike Intrator dismissed the market moves in a memo on Wednesday, saying the market sometimes misunderstands new technology companies.

“When you are building a new type of technology company there will be periods of time when the market misunderstands and acts irrationally,” he wrote.

“We are confident in our backlog which more than supports all of our debt obligations.”

The company's backlog exceeds $100 billion, with around two-thirds coming from investment-grade counterparts, including Microsoft, Meta, IBM and Caterpillar, Deutsche Bank said in a note on Thursday. The bank reiterated its buy rating on CoreWeave shares, calling the market dislocation a buying opportunity.

However, concerns could spread to other AI-related companies.

“The problem is this kind of concern can prove to be a self-fulfilling prophecy, and risks triggering broader issues in other AI-related names,” said Jim Reid, global head of macro and thematic research.

Oracle's five-year CDS spread also spiked this week, reaching 282 basis points, a roughly 10% increase in one week.

“A downgrade from its BBB rating would risk pressuring IG-only investors into forced sales,” Reid said.

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