CoreWeave falls about 11% midday as AI debt fears hit chip stocks

The wider market: At 10:24 a.m. ET, the Dow Jones Industrial Average was up 0.43% at 52,401.89, its highest level in over a month, lifted by Goldman Sachs and JPMorgan Chase, Reuters reported. The S&P 500 was down 0.09% and the Nasdaq Composite down 0.70%. AP said the Nasdaq was headed for its first weekly loss in five weeks. Reuters also reported, citing people familiar with the matter, that some current and prospective Anthropic investors are weighing a lower valuation for its upcoming IPO.

How the week unfolded: On Tuesday, the yield on CoreWeave's 2032 bond touched 15%, CNBC reported. On Wednesday, after a hotter-than-expected September inflation report pushed Treasury yields up, the stock fell about 15.5%, its worst day since February, according to Axios and CNBC. On Thursday, the yield on its 9.75% bond due 2031 reached 15.78% and the cost of insuring its debt against default rose above 1,140 basis points intraday before easing to about 1,038, CNBC reported; Reuters said that level implied a nearly 63% chance of default within five years, up from about 30% a year ago. The shares still closed up 5.94% Thursday after Nvidia CEO Jensen Huang said "CoreWeave's financial strength is improving every day." Friday's drop erased that rebound.

The case that the selloff is overdone: Huang told reporters in Stockholm he sees no need for Nvidia, CoreWeave's second-largest investor with about a 10% stake, to backstop the company, Reuters reported. CEO Mike Intrator told employees in a memo that the company's backlog "more than supports all of our debt obligations." Deutsche Bank said that backlog is over $100 billion, about two-thirds of it with investment-grade customers such as Microsoft and Meta, according to CNBC. Jefferies and JPMorgan called Friday's fears "overdone," with JPMorgan noting capacity is pre-sold under long-term take-or-pay contracts, and Cantor Fitzgerald said "false narratives" were running amok.

The case for worry: CoreWeave reported negative free cash flow of $5.7 billion in its most recent quarter, Axios reported, so it needs more borrowing or a new investor to keep building. Research firm Gartner said this week that about 80% of neoclouds could shut down by 2030, Reuters reported. A spread above 1,000 basis points is generally a sign of credit distress, S&P Global Market Intelligence's Gavan Nolan told CNBC, and Deutsche Bank's Jim Reid warned the concern "can prove to be a self-fulfilling prophecy." Some analysts also question whether take-or-pay contracts are iron-clad, CNBC said.

What remains unknown: Whether CoreWeave can borrow again at lower rates, whether Nvidia or a major customer such as Microsoft steps in with more capital, and whether its push for an investment-grade credit rating, which co-founder Brannin McBee described to the Financial Times, succeeds. Futures markets put the odds of a Fed rate hike this month at about 17%, CNBC reported; a hike would raise borrowing costs further.

Share and index moves are intraday figures at the times stated and may change by the close. Default probability is Reuters' reading of credit-default-swap pricing, not a forecast. The Anthropic IPO valuation report cites unnamed people familiar with the matter. Hero is a 2021 file photo of the Nasdaq MarketSite in Times Square, where CoreWeave shares are listed.