Core Braid (CRWV) There’s a problem that most IT companies are certainly trying their best to solve.
The demand came flooding in.
The AI cloud provider ended the second quarter with a sales backlog of nearly $104 billion as companies scramble to get the processing power they need to build and operate more advanced AI models.
Even this huge amount of money cannot cover all the expenses that come in.
CoreWeave said it secured more than $25 billion in net new customer commitments at the start of the third quarter and increased its contracted power capacity to approximately 4.2 gigawatts.
Great potential. The same goes for bills.
CoreWeave had $35.6 billion in debt as of June 30 as the company invested heavily in data centers, power and energy. NVIDIA (NVDA) Graphics processing unit.
The company’s net interest costs reached $640 million in the second quarter alone.
That leaves Wall Street facing a concern that could determine the next move for CoreWeave stock: Can its astonishing growth in artificial intelligence outpace its financing costs?
Karl Keirstead of UBS thinks investors may be too negative on solutions.
According to MarketWatch, the analyst initially gave the stock a buy rating and a $120 price target, saying the biggest problem facing CoreWeave stock may be nearing its peak.
CoreWeave’s AI growth is accompanied by huge financing
Wall Street views CoreWeave very differently, which may be traced to the company’s recent financial performance.
According to the Wall Street Journal, second-quarter revenue surged 112% to $2.58 billion from $1.21 billion in the same period last year. Adjusted EBITDA more than quadrupled to $1.51 billion from $753 million.
As of June 30, backlog revenue reached approximately $104 billion. CoreWeave said this figure does not include more than $25 billion in net new customer commitments added at the beginning of the third quarter.
In addition to these commitments, its physical infrastructure has grown significantly.
CoreWeave added approximately 500 megawatts of active power in the second quarter to approximately 1.5 gigawatts. Power generation contracted to about 3.7 GW at the end of the quarter before rising to more than 4.2 GW on August 11.
Another interesting data item comes from the company in September.
CoreWeave said in a company update on Sept. 17 that short-term customer contracts signed in the third quarter were priced at approximately $40 million per megawatt, calculated by dividing annualized revenue by the power needed to service the associated clusters.
These numbers help explain why investors are interested in CoreWeave.
But there’s another set of statistics that may explain why they’re afraid.
CoreWeave’s revenue grew rapidly, but it suffered a net loss of $626 million in the second quarter. Net interest costs were $640 million, compared with $267 million a year ago.
CoreWeave disclosed total debt of $35.6 billion in its second-quarter Form 10-Q filed with the SEC on June 30.
CoreWeave also said it would pay $4.4 billion in principal during the remainder of 2026 and $6.2 billion in 2027.
“We respect the concerns (primarily leverage/credit risk) but have concluded that they are peaking,” Keirstead said, according to MarketWatch.
CoreWeave acknowledges the risk of debt. The company warned in its second-quarter Form 10-Q that its high debt could make it more vulnerable to economic and industry changes, making it harder to raise capital and use cash flow to pay down debt.
The company’s filings with the U.S. Securities and Exchange Commission warned that high borrowings could limit its ability to obtain new financing, reduce the company’s otherwise available cash and increase its exposure to adverse economic and industry conditions.
This creates a strange investment equation.
CoreWeave has no problem finding customers. Instead, it must raise large amounts of capital to build infrastructure fast enough to meet those requirements while generating enough future cash flow to support financing.
UBS believes the market may be too focused on one side of the issue.
RELATED: Bank of America adjusts CoreWeave stock forecast after earnings
CoreWeave has also been trying to change the economics of how companies fund their growth.
The company entered into an $8.5 billion non-recourse delayed-draw term loan facility in March, secured by high-performance computing infrastructure and related customer contracts.
The facility has an A3 rating from Moody’s and an A (low) rating from DBRS. These ratings relate to the financing arrangements and not to CoreWeave’s overall credit profile as a company.
This is an important distinction.
CoreWeave is not free from the financial risks that come with its growth. But the ability to finance specific infrastructure based on contract customer demand gives it an alternative to standard corporate borrowing for growth.
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UBS expects CoreWeave stock to climb to $120
Keirstead initiated coverage on CoreWeave on September 23, with a Buy rating and $120 price target.
The target implies an upside of approximately 38% from CoreWeave’s September 22 closing price of $86.76.
He acknowledged that CoreWeave has financial risks.
UBS believes that market concerns about debt and credit risks are reaching their peak, while the fundamentals of demand for artificial intelligence computing remain strong.
A particularly key part of the debate is how much money CoreWeave can make from its power capabilities.
According to Barron’s, Keirstead estimates CoreWeave’s current revenue per gigawatt is about $11 billion, and expects that number to eventually exceed $15 billion as GPU pricing and computing economics improve.
For a company that spends billions of dollars protecting power and building data centers, the shift could be huge.
This will significantly increase revenue per gigawatt, allowing CoreWeave to improve the economics of its infrastructure without adding additional physical capacity.
UBS also expects demand for AI infrastructure to gradually expand from the cutting-edge AI labs that drove much of the industry’s early development to more typical business clients.
This is important because CoreWeave relies heavily on a small number of customers.
UBS said its three largest clients accounted for nearly 72% of its revenue.
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CoreWeave is always looking to expand its customer base. The company said in the first quarter that it had struck multiple deals with Meta, including a new $21 billion commitment.
It has entered into a multi-year agreement with Anthropic to provide infrastructure for the development and deployment of its Claude model.
Jane Street subsequently committed approximately $6 billion to CoreWeave’s AI cloud platform and invested $1 billion separately in the company at $109 per share.
CoreWeave has also expanded beyond the largest tech and artificial intelligence companies.
Biotech data platform Harell Data said on September 23 that it has signed a multi-year agreement to use CoreWeave Cloud for artificial intelligence model training, fine-tuning and inference.
Workloads will run on Nvidia A100 and Hopper GPUs. Harell’s technology is designed to enable models to process proprietary scientific data sets without having to extract the underlying data.
No financial details were disclosed.
An enterprise agreement doesn’t eliminate CoreWeave’s customer concentration problem.
But technology, financial services and biotech deals underscore the broader corporate demand premise behind UBS’s forecast.
CoreWeave’s $4.2 billion deal puts debt back in the spotlight
CoreWeave’s new funding highlights the pressure behind UBS’s positive forecast.
The company also completed the issuance of $4.2 billion of 2.875% convertible senior notes due 2033 after the buyer fully exercised its $500 million option. The notes will have an initial conversion price of approximately $97.85 per share.
This relatively modest coupon rate is reasonable compared to some of CoreWeave’s current borrowings. Its June filing showed effective interest rates on various loans with delayed withdrawal terms ranging from 9% to 15%.
Convertible debt also carries the danger of shareholder dilution. CoreWeave has engaged in approximately $566 million in capped call transactions designed to offset the impact in certain circumstances.
But despite this, big companies are still pouring resources into CoreWeave.
The startup raised $2 billion from Nvidia in January at $87.20 per share. These companies also hope to accelerate the construction of more than 5 gigawatts of artificial intelligence factories by 2030.
This forces investors to face two contradictory facts.
CoreWeave has US$35.6 billion in debt and high financing costs. However, quarterly revenue doubled, with the order backlog reaching $104 billion as of June and customer commitments exceeding $25 billion at the start of the third quarter.
UBS’s $120 target is based on the premise that investors have exaggerated CoreWeave’s financial burden and underestimated the economics of its rapidly evolving artificial intelligence infrastructure.
The question now is whether CoreWeave can turn this extraordinary demand into revenue quickly enough to exceed the cost of financing its growth.
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