Transcript of THE $35B AI MARGIN SQUEEZE: Why The Bond Market Just Slashed CoreWeave!
Wall Street Truthbombs
0:00The same company borrowed money at about0:026% and at almost 15% in the same year.0:07And that gap just knocked 15% off its0:10stock in one single afternoon, my0:12friends. The company is CoreWeave, and0:15by the end of this video, you're going0:17to understand exactly why the bond0:18market is charging one AI company two0:22completely different prices for money,0:24and what it means for your money if you0:27own anything touched by the AI buildout.0:30Short version, the demand story is real.0:33The financing story is getting more0:35expensive, and stockholders are at the0:38back of a very, very long line. Let me0:41start with dinner. I'm the least0:43adventurous diner in New York City. I0:46order the same thing from the same place0:49every time. A few weeks ago, a0:51nor'easter rolled into town. You0:53probably remember that. Rain was0:55literally going sideways, and half the0:57city ordered in at once. The delivery1:00app, well, it was flashing red. High1:03demand, long waits. So, my wife called1:05the restaurant directly. They knew our1:08order before she even finished saying1:10her name.1:11Dinner was at the door in about 201:14minutes. Everybody else was probably1:16staring at a 90-minute estimate and a1:19surge fee. Same kitchen, same rain, same1:23exact food. Two completely different1:26prices. And the only difference was who1:29the kitchen already trusted. On1:32Wednesday, the market watched the exact1:34same thing happen to CoreWeave. Except1:37the kitchen at was a data center, and1:40the menu, well, that's money. And the1:42walk-ins are being asked to pay almost1:4515%.1:47Stay with me.1:48Here's the story you got from the1:50headlines. On Wednesday morning, the1:52September inflation report came in1:54pretty hot. Consumer prices rose by 3.7%1:57over the past year. That was up from1:593.4% in August and above what economists2:03were expecting. The Fed already raised2:05rates in September and right after the2:08print, the odds of another hike this2:09month roughly doubled before fading back2:12a little bit. Then the AI stocks2:14literally cracked. Coreweave fell by2:18about 15 and 1/2% to close at 65 bucks2:21and 78 cents. Oracle fell almost 9%.2:25Nebius and Dell got hit pretty hard,2:27too. By one estimate, about 80 billion2:30dollars of market value literally2:32disappeared from just those four names2:35in a single session. And the story2:37pretty much wrote itself. Hot inflation,2:39higher rates, sell the AI trade. And the2:42inflation report was certainly the2:44match. But the kindling had been piling2:48up for weeks. And not in the stock2:50market, in the bond market. See, on2:53Wednesday, a chart started going around2:56social media.2:57One analyst posted it and Elon Musk3:00replied with one word.3:02Yikes. It was not a stock chart. It was3:06the yield on a Coreweave bond.3:09Stockholders simply caught up to what3:11the lenders had been saying all along.3:13And you've been hearing it from me for3:15quite a long time now, my friends. So,3:17what is a Neocloud? Well, the newest3:21layer of the AI economy and the business3:23model is simple on paper. You borrow3:26money, you buy Nvidia chips, you fill a3:29data center with them, and you rent that3:31computing power to AI labs and big tech3:34companies in a hurry. A real hurry.3:37Borrow at one rate, rent at a higher3:39one, and hope the spread outlasts the3:42chip. The category has a roster now and3:45it goes like this. There's Nebius,3:47there's Lambda, there's Crusoe. Who3:49else? We We Enscale, Fluidstack, but3:53CoreWeave is literally, my friends, the3:55poster child. And I've been watching3:57that one really closely. At the end of3:592022, it had three dedicated data4:02centers. Today, it operates, get this,4:0551. And it paid a lot of that growth4:09with debt. So, how much debt? Well,4:12at the end of June, CoreWeave carried4:14about $35.1 billion worth. Six months4:18earlier, it was about $21.44:20billion. That is roughly $14 billion in4:24new debt in literally half a year. I had4:26a heated debate about this very thing on4:29live TV a few weeks ago. You probably4:32saw it posted. You know who you are,4:35those folks that were pushing back on4:36me, you equity heads that were yelling4:39at me because I was telling you to watch4:41the debt. And the pushback is always the4:44same. Mark, the demand is real. And you4:47know what? They are right. The demand is4:50real. And we're still buying stocks, but4:52we're watching the debt very, very4:54closely because if some cracks start,4:56that's where they're going to start.4:58But, demand is not the question here.5:01The question is is who gets paid first5:04when the bill comes due.5:06My friends, let's dig further into this.5:09But before we do, please click like and5:11don't forget to subscribe. It's really5:13important to be in the know, and this is5:14exactly how you do it.5:18Now, let's start with the bill that I5:20was talking about. In the second5:22quarter, CoreWeave's interest expense5:24was a whopping 640 million bucks. A year5:28earlier, it was 267 million. Revenue in5:31the quarter was about 2.6 billion. So,5:34roughly a quarter of every revenue5:36dollar went straight to lenders. And the5:39company has guided third quarter5:41interest to somewhere between 8605:44million and about, I think, 940 million.5:48Did I say billion? I meant 860 million5:50and 940 million. To be fair, Coreweave5:53also reported a revenue backlog of about5:56104 billion at the end of June. A5:58backlog, and we like backlogs, and it6:01says it has signed more than 25 billion6:04of new commitments since that time6:06alone. But a backlog, my friends, even6:08though we like them, is a promise of6:11future revenue. Interest is actually a6:14bill that arrives every 90 days, whether6:17or not the data center is finished or6:19the customer is ready. Now, here's the6:22part of this story that I've not seen6:24anybody else line up side by side. In6:27March, Coreweave closed an 8.56:30billion-dollar loan that Moody's rated6:32A3. That, my friends, is investment6:35grade. It was priced at roughly 5.9%6:38fixed. It was secured by the chips6:40themselves and by a long-term contract6:43with a big-name customer, reportedly6:46Meta. That sounds about right. And6:48earlier this month, Lambda, a6:50competitor, closed a 1-billion-dollar6:53loan at 6.78%6:56fixed. That was rated Baa1,6:59backed by contracts with two7:01investment-grade customers. Cheap money7:04is there as long as somebody richer7:07signed the contract. Now, look at the7:09other side of Coreweave's balance sheet.7:12In June, the company sold 1.25 billion7:15dollars of unsecured bonds due in 20327:18with a 9 and 5/8 coupon. No specific7:22collateral, just the company's promise7:25to pay. 4 months later, on Wednesday,7:28that bond was trading at a yield of7:30about 14.8%7:33For comparison, Oracle's bond maturing7:35that same year was yielding about 7.24%.7:40Same company, same chips, same year.7:44Roughly 6% for one lender, nearly 15%7:48for another.7:50You might be thinking, how is something7:52like that even possible? Well,7:54because cheap lenders were never really7:56lending to the Neo cloud, they were7:59lending to its customers' signatures.8:02When a blue-chip tech giant commits to8:04rent the computing power for years, the8:07loan secured by that contract gets a8:09table immediately. The regulars, they8:12always do. The unsecured bondholder is8:15the walk-in. He's standing in the rain8:17behind every secured lender, and he gets8:21whatever's actually left in the kitchen,8:23if there even is anything left in the8:24kitchen. That 14.8% is not the market8:28saying AI is a fad, it is the market8:30saying, I know exactly where I am in8:33line, and I want to be paid for that8:36wait. And here is the number that nobody8:38put in the headlines, my friends, that8:40investment grade loan is the exception.8:43It's not the rule. In August, Coreweave8:45lined up another secured loan, 2.68:48billion worth. This one was rated below8:51investment grade, no surprises there.8:53According to the credit research firm8:55Octis, it was marketed at roughly 4.25%9:00points over the benchmark rate. Demand,9:05as you might not guess, as you might9:07guess, it was soft. So, the price went9:10up to 5.5 points over, and it still had9:13to be sold at a discount. Secured, and9:16the kitchen still made them wait. And9:19where's the most of the money in line?9:22Well, of that 35.19:24billion dollars of debt, about 31.49:27billion is called recourse debt. That9:30means the whole company is on the hook.9:33Only about 3.7 billion is non-recourse,9:37where lenders can only go after the9:39specific assets pledged to them, like9:42the chips or servers or any kind of real9:44estate. And that big $8.5 billion9:47investment-grade loan, well, it's a9:50draw-as-you-go9:51facility. The money cap comes in as the9:54data centers get built. So, the cheap9:56seat is real, but it's a small, a very10:00small table, which brings us back to10:02what happened on Wednesday. According to10:04CoreWeave's own quarterly filing, about10:06$7.5 billion of its debt comes due10:09within 12 months of June 30th. At10:12Wednesday's close, the 30-year Treasury10:14yield was sitting near its highest level10:17since early 2002. Refinancing at 202410:21rates and refinancing at 2026 rates, my10:24friends, are two very different10:26businesses. Every hot inflation print10:28raises the price the walk-in pays to get10:31a seat.10:34My friends, I have seen this movie10:36before. In the late 1990s, I worked on10:39tech deals during the telecom boom doing10:42M&A uh for uh technology. I had a10:45front-row seat on this stuff. The pitch10:47was actually irresistible. Bandwidth10:50demand was exploding. The new phone10:53companies financed it with junk bonds10:55and vendor financing. Sound familiar?10:58Equipment makers like Lucent, like11:00Cisco, and Nortel lent their customer11:02the money to buy their own gear. Cisco11:05had a $180 million financing line to one11:09of those companies. It was called ICG11:12Communications. ICG drew 99 million of11:16it. Then in November of 2000, guess11:18what? ICG filed for bankruptcy with11:21about $2.81 billion11:24of liabilities against uh about $2.7911:27billion of assets.11:30By one academic account, almost half of11:32the publicly traded upstart phone11:34companies filed for bankruptcy between11:372000 and the fall of 2002. In the second11:41quarter of 2001, Nortel posted a 19.411:45billion-dollar loss, mostly writing off11:48acquisitions it made at the top while11:50the customers it lent to were going11:52under literally every day. Today's11:55version has a bit of a twist and I can't11:57ignore it. Nvidia has taken equity12:00stakes in several of the neo clouds that12:02buy its chips, Coreweave and Nebius12:05among them, most famous ones at least.12:07Different structure, familiar shape, but12:10I will not pretend that this is 200012:12because, my friends, it really is not.12:15The telecom upstarts built networks for12:17customers who actually never showed up.12:20The neo clouds are renting to the12:22richest companies on the planet Earth.12:25Yesterday, TSMC, the company that12:28actually manufactures the chips, posted12:30its six straight record quarterly profit12:33and said AI demand is extremely robust.12:36What are you12:39CEO told his staff in a memo that the12:41backlog more than supports all of the12:44company's debt obligations and that the12:46market is acting, well, this is his12:48word, irrationally. And those12:50investment-grade loans are themselves12:53proof that the model actually works.12:55When the contract is ironclad and the12:57lender is first in line, that's what's12:59happening here. So, what should you be13:02asking right now? Not is AI real? That13:05question, I think, I hope, has been13:07answered. The better question is about13:10really the boring stuff, the stuff that13:12I talk about a lot here on this channel,13:14the plumbing. Does anything I own depend13:17on somebody else's borrowing at 15%?13:20When I read about a giant AI contract,13:23do I ask who's financing the chips? Am I13:26asking and and am I mistaken a demand13:29story which looks solid for a financing13:32story which is getting more and more13:34expensive by the week?13:36So, I'm not worried about AI demand. I'm13:39really not. I'm worried about how the13:41building is being paid for. And this is13:44something this is a theme that I've been13:46talking about a lot lately. If things13:48ever get tight, the secured lenders13:50holding the chips and the contracts get13:52paid first. The unsecured bond holders,13:55they get paid out next out of whatever's13:58left and the stock holders, the stock14:01holders are at the very back of the14:03line. The bond holders near the back are14:06demanding almost 15% to just stay in14:09line. If you own the stock, you're14:11standing behind those folks. When I14:13explained all this to my wife, she put14:16it better than I could have done. So,14:18the bond holders are the walk-ins and14:21the stock holders are the ones still14:22looking for parking.14:25She was right. She's always right. So,14:27your truth bomb for today is this. The14:29AI boom has two prices for the same14:31money. 6% if a giant signed your14:34contract and 15% if you're on your own.14:38And when the bond market starts sorting14:40the regulars from the walk-ins, well,14:42the stock holders, they find out real14:44fast that they never had a reservation.14:48My friends, join me every day for Wall14:49Street Truth Bombs where I drop them14:51right here before the market figures14:53them out.14:55>> [music]
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