The stocks and bonds of CoreWeave were both sold off on Wednesday due to investors' concerns that some technology companies have taken on too much debt for artificial intelligence initiatives.
The stock price of this so-called “neocloud” company plummeted by 16%, while its debt yield soared significantly. The yield to maturity for the company’s bonds due in 2032 with a coupon rate of 9.625% is 14.8%, and for the bonds due in 2031 with a coupon rate of 9.75%, the yield to maturity is approximately 14.9%. The trend of bond yields is opposite to that of their prices.
Wells Fargo Investment Institute, Co-Director of Global Fixed Income Strategies, stated that investors were once enthusiastic about participating in the AI craze, but now market sentiment has begun to change.
He said that investors now demand higher risk compensation.
Alvarado said, "The era of easy financing we experienced in the first nine months of this year is beginning to disappear and fade away. Now, every additional dollar, or even a marginal dollar, will be scrutinized more carefully to see how much concession the issuer is offering you."
Investor Chamath Palihapitiya – the founder and CEO of investment company Social Capital, and also the CEO of AI company 8090 – mentioned the soaring yields during a speech on X later on Tuesday. Subsequently, Tesla and the CEO of SpaceX, Elon Musk, responded with: “yikes.”
Palihapitiya shared a chart of a bond maturing in 2032, pointing out that its yield “reached 15%”, and then it closed at a new high on Tuesday. He also posted a part of his in-depth analysis regarding whether the construction of AI is creating a private credit bubble, mentioning that “lenders seem to have charged very little additional fee for the risks associated with AI”.
Tech sector suffers setbacks
Affected by the debt burden of AI, it's not just CoreWeave that is concerned. For example, on Wednesday, the stock price of Oracle fell by nearly 7%. Its bond yield also increased; the yield for bonds maturing in November 2032 with a coupon rate of 6.25% reached 7.24%.
The overall tech sector dragged down the stock market on Wednesday, with the Nasdaq Composite Index falling by 1.4%. This concern over debt seems to have a particularly significant impact on weaker stocks outside of the "Big Seven."
Another neocloud stock, Nebius, fell by 9%.
As companies compete to build AI infrastructure and turn to the credit market for project financing, the supply of bonds has increased accordingly. The stock price of Dell plummeted by 10%.
JPMorgan Chase stated that, overall, the spending of hyperscale cloud service providers is expected to reach $800 billion this year. The bank noted that by 2027, this figure is expected to exceed $1 trillion per year.
