CoreWeave's bond yields have climbed to 15% and higher, and the Motley Fool's Adam Levy says that signals trouble for Nvidia. Nvidia has invested $2 billion in each of CoreWeave and Nebius, so it could face financial pressure if neoclouds start to fail.
CoreWeave's stock was hit after venture capitalist Chamath Palihapitiya shared a chart showing its bonds set to expire in 2032 touched a 15% yield. CoreWeave is a neocloud company backed by Nvidia.
The bonds carry a 9.625% coupon and were issued in June. Reuters later reported that CoreWeave's 9.75% notes due in 2031 topped a yield of 16%.
Rising yields point to higher default risk
Levy writes that the rising yields indicate the market believes CoreWeave's risk of default is increasing. Doubts are starting to creep in about whether the company can generate returns on invested capital that exceed its cost of capital, especially amid a rising interest rate environment. Nebius faces similar pressures, according to the article.
Nvidia is exposed to the neoclouds
Nvidia invested $2 billion in each of CoreWeave and Nebius earlier this year, so any decline in their stock prices has an immediate impact on its balance sheet. Last year, Nvidia also agreed to buy any unused CoreWeave capacity through 2032.
CEO Jensen Huang says he doesn't think the company will have to step in. CoreWeave, for its part, cites a $104 billion backlog of contracted revenue, and management says that is more than enough to cover its debt obligations.
Financing plans draw bank objections
Nvidia could end up lending CoreWeave more money through its financing arm. Its plans to finance up to $500 billion in AI build-outs have faced objections from its banking partners over the residual value of its GPUs. The chips serve as collateral for the debt, so if they retain less value than Nvidia claims, Nvidia will have to cover more of the default risk itself.
Levy notes that investors pay 23 times forward earnings expectations for the stock after the company grew its bottom line by 126% year over year. In his view, the bond market showed why investors probably shouldn't be willing to pay more than that.
Source: The Motley Fool
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