CoreWeave’s 15% debt cost threatens data center economics

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 19:42

   Well, the answer is yes, I am. Okay, but talk about that because so this is what I want to get your expertise. What I'm seeing lately is they're talking about these neoclouds, right? Yes, neoclouds. You know what those are? Yeah, it's these cloud service companies that buy a bunch of GPUs and they rent them to people that want to do AI. They're basically making data centers, but they're not Amazon or Google.

2. 20:06

   It's like WeWork for data centers. It's CoreWeave and Nebius, the two companies. Yeah, and I see this worrying headline that their credit default swaps, which is a word I know from watching The Big Short, are now underperforming. They're bad. They're bad. They're bad. Right. Or another way to put it is CoreWeave, when they actually raised debt earlier this year, the interest rate was 9%. But the price of that debt has gone down so much that the yield currently is 15%.

3. 20:40

   Right. Which means, of course, that if they had to raise new debt, it would be 15%. Right. And they seem to have to. And you ain't building no data center with 15% debt. Forget it. It just doesn't pencil out anymore. Did it pencil out before? It probably penciled out at 9%. It wasn't 15% before. It was nine, and now it's 15. I mean, at nine, does it make sense? That's the big question, right? I couldn't tell you for sure, but it's certainly a lot better than 15.

4. 21:04

   Because again, in grammar school, I learned 15 is a lot more than nine. That's why you've had big bucks. I really paid attention in grammar school. No, but so, okay. So the next logical step, right? If they can't raise the money, is that they go under. Yes. And so, I mean, you see things like Jensen Wong coming out and kind of like trying to calm the market about Corwee and trying to, what happens next?

5. 21:24

   Jensen Wong's going, you've been through this. OK, don't panic. You've been through credit default swaps. You're like, what happens next? Doesn't that seem like the next logical step? is that these things go under and then maybe people start looking up the stack at like people that have also borrowed well meta's free cash flow negative yes amazon's free cash flow about meta meta you know they can always cut costs okay the guys like core weave and nebius they don't make money yeah they lose money yeah they've got great business they've got massive commitments and they need the debt markets to behave to function and if the debt markets don't behave, they don't function. That's all there's to it. If Google raised some capital, but at least I don't think he's worried that Google's going to go bankrupt. Maybe they'll cut costs somewhat

6. 22:10

   here and there, but when the fixed income markets start to get shaky, it's the weak hand that gets hurt. But you could be worried. I see what you mean with a meta and a Google, because ultimately they have this other business that's financially supported them for a long time, right? But an An OpenAI or an Anthropic, which is bigger than the companies that you're talking about, are in a vulnerable position because they're not.

7. 22:34

   They don't have the back stuff that these other companies do. But you don't have to worry about it.