Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
I have a confession to make. Before I send anything off for publication, I usually run it past someone in my trusted circle, such as a family member, friend, or former colleague. Thousands of people will parse my words, and so I like to test the waters before subjecting myself to the unsparing scrutiny of the FT Alphaville editors or readership.
IPOs go through a similar process. In the US, companies looking to go public can gauge institutional investor interest before formally launching an offering. This “testing the waters” (TTW) process is designed to give investors time to familiarise themselves with the company and provide feedback to the management and underwriters.
TTW was introduced in the US by the JOBS Act of 2012, permitting “emerging growth companies” to privately engage with qualified institutional buyers before or after filing a registration statement. In 2019, the SEC extended this flexibility to all issuers. In theory, TTW reduce the risk of the kind of faceplant that happens when a company and its underwriters market an IPO with an unrealistically high price range or overambitious size.
But theory and practice often part ways. The initial public offering of AI infrastructure firm CoreWeave, initially targeting a $2.7bn raise at $47-55 per share, was slashed to $1.5bn at $40 per share. Even then, the deal barely limped across the finish line, thanks to a last-minute $250mn “anchor” order from Nvidia. The offering reportedly ended up with just three investors holding 50 per cent of the stock, and it seems to have required some stabilisation from lead bank Morgan Stanley to avoid a first-day drop. Hardly a textbook success.
CoreWeave isn’t an isolated case. Earlier this year, the IPO of LNG exporter Venture Global was similarly downsized and downpriced, only for the shares to plunge in the after-market. If the TTW process is supposed to prevent such misfires, what’s going wrong?
It’s not as if investors were hard to reach. CoreWeave, with its AI narrative and blue-chip backers, was a high-profile float. Every institutional investor would have wanted a meeting. Nor were the company’s red flags hidden. Investors on the TTW circuit presumably knew all about the massive debt pile, cash burn, extreme customer concentration, and eyebrow-raising ebitda adjustments.
The original price range and deal size now seem like wildly wishful thinking. While market conditions had softened, the magnitude of the “miss” points to deeper failures. Either investor feedback was a lot weaker than bankers initially led management to believe, or management was unwilling to accept reality — or, more likely, both. Eager to win the mandate, investment banks may have pitched an overly aggressive valuation and then struggled to dial it back once investor feedback came in far lower. And once committed to an optimistic price range, management may have refused to adjust expectations, holding the banks to their own rosy pitch numbers.
It feels like a classic case of “pitch now, adjust never” — everyone gets stuck defending numbers that were never realistic to begin with. As a result, the IPO lacked momentum from the start.
The messaging around order-book coverage only made matters worse. Syndicate banks claimed the IPO was fully subscribed on day one, citing “early mutual fund support and one-on conversions,” and later reported that the book was several times covered. But investors saw through the spin, recognising that much of the demand likely came from hedge funds inflating their orders — standard practice to secure a better allocation if the deal gains traction. Most fund managers know better than to put much stock (pun intended) in such coverage claims. After all, SailPoint’s IPO was supposedly 20 times covered, and yet it still dropped in the after-market.
Another issue involved the Nvidia $250mn anchor order. Typically, anchor investors publicly commit early to signal confidence. Nvidia’s last-minute move suggested an emergency patch rather than a strategic endorsement. Given Nvidia’s multiple roles with CoreWeave — shareholder, supplier, customer — its involvement was always going to be viewed as complicated. The belated timing only reinforced concerns.
With weak demand and a last-minute bailout, only a true believer would have asked for a sizeable allocation of stock, and so it’s no surprise that CoreWeave’s IPO ended up with a highly concentrated order book. According to Bloomberg, half of the shares were allocated to just three investors.
The tight distribution may have prevented aggressive day-one selling, but it stores up a new problem. A successful IPO benefits from a broad base of investors willing to trade the stock in the open market. Without marginal buyers, the stock struggles to find natural demand and tends to grind down over time. CoreWeave will need to outperform financial expectations or hope for a return of AI frenzy in order to attract new buyers.
And the company has its work cut out for it. Unfortunately, investor sentiment was overwhelmingly negative towards the IPO. A poll by RBC Capital Markets — who had no role in the float — found that the vast majority of investors saw no real competitive moat in CoreWeave’s business model. With hindsight, a lower range and smaller size might have created a better platform for CoreWeave’s debut as a public company.
CoreWeave’s IPO didn’t struggle because of bad luck. Every investor I speak with has huge appetite for new listings. The problems began with inflated expectations — likely fuelled by bankers eager to win the mandate and management reluctant to adjust. The TTW process failed to translate into realistic deal terms. Oversubscription claims rang hollow. The Nvidia infusion smacked of desperation. And the concentrated allocation leaves the stock vulnerable.
The broader lesson is that fund managers are wise to the old IPO playbook. Unless banks reform their modus operandi, CoreWeave and Venture Global won’t be outliers but harbingers of more high-profile misfires.
One final note: I didn’t show a draft of this piece to anyone before submitting it. If you think I’m off base, you’re proving my point about testing the waters.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
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Sovereign credit analysts have a great life. They’re paid to fly around the world, rub shoulders with policy movers and shakers, build glorious Excel workbooks, and dispense important opinions.
Moreover, these opinions don’t need to change very often. It’s probably preferable if they don’t. In the case of the United States government there have been only two full-on rating actions from the three main agencies in the past century. (We’re not counting changes in rating outlook.)
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But with US debt metrics having deteriorated meaningfully, it might seem reasonable to expect the agencies to be the bearer of bad news before too long.
We wrote to Moody’s and S&P earlier in the week to ask them about any forthcoming rating actions. And within 24 hours both agencies came out with rating actions. Did they downgrade? Readers, they did not.
What supports these super-high ratings? Let’s take a look.
First up, it’s not some rosy projection for debt-to-GDP:
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Back in 2011 — when S&P downgraded the sovereign to AA+ — the CBO projected federal debt held by the public would rise to 80 per cent of GDP by 2030 (pink line). Things turned out somewhat worse, and the bipartisan federal agency’s latest long-term fiscal forecast (red line) is now for publicly held debt to hit 109 per cent of GDP by 2030.
Moreover, the CBO forecast is predicated on current law — so doesn’t take into account the prospect of Trump tax cuts becoming permanent. Furthermore, it has federal revenues ticking persistently higher as a share of GDP. In reality, revenues have undershot forecasts. Maybe tariffs will fill the hole? It seems unlikely.
Of course, S&P’s own forecasts would’ve been more important to their analysis. Back in 2011, the rating agency projected net debt to rise to 78 per cent of GDP in ten years’ time. Under a downside scenario they mapped out, consistent with a further downgrade to ‘AA’, they projected net debt could reach 101 per cent of GDP. According to the CBO, this figure hit 102 per cent of GDP in 2021.
To be fair, debt-to-GDP is a silly metric of fiscal space. Moody’s reckons it’s heading to 130 per cent of GDP by 2035 (light blue dashed line) but this doesn’t get in the way of their AAA rating.
The real metric that we should be looking at, according to Moody’s, is debt service. As its analysts wrote in their 2023 rating report:
For a reserve currency country like the US, debt affordability — more than the debt burden — determines fiscal strength.
So maybe this is projected to improve? Nope.
For years, low bond yields, more than offset the fiscal costs of higher debt loads. Today’s higher bond yields change the picture. Again, we took CBO long-term forecasts to compare today’s projections (in red) to those made in yesteryear (with 2011 forecasts in pink), and added the forecasts contained in this week’s Moody’s AAA rating report:
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Not a great picture. It almost seems as if trying to find some connection between debt metrics and the sovereign rating is a fool’s errand.
And — to be fair to the agencies — this is almost what they say too.
In its most recently published rating opinion, S&P assigned the government its second worst score for fiscal flexibility and performance, and its very worst score for debt burden. And according to Moody’s:
Even in a very positive and low probability economic and financial scenario, debt affordability remains materially weaker than for other AAA-rated and highly-rated sovereigns.
Outlining the main risk factors to their ratings, S&P starts not with fiscal factors, but instead say:
We could lower the rating over the next two to three years if unexpected negative political developments weigh on the strength of American institutions and the effectiveness of long-term policymaking, or jeopardize the dollar’s status as the world’s leading reserve currency.
While Moody’s writes that:
As a result of continued fiscal weakening, the US’ extraordinary economic strength and the unique and central roles of the dollar and Treasury bond market in global finance now play an even more important role in supporting the sovereign’s AAA credit profile.
So America’s top ratings really rest on effective policymaking, maintaining the strength of its institutions, and the continuing central role of the US dollar. Gulp.
It looks like the kind of coercive debt swap outlined in a paper authored by Stephen Miran, now Chair of the President’s Council of Economic Advisors, might not be understood as a credit-positive event.
Pedants may complain that the notion of a sovereign’s local currency credit rating being anything less than perfect is a nonsense. After all, it’s hard to run out of tokens that you can literally magic out of the air. But local currency defaults do happen pretty regularly.
Still, the difference in default probabilities associated with the various different highest credit ratings is angels-on-a-pinhead stuff. And that’s the job of a rating analyst — provide an assessment as to whether the chances of this happening over the next five years might be the kind of 0.0 per cent incidence of default attached to a AAA rating, or a 0.1 per cent chance that might be attached to a AA rating.
Would anyone really care if the US slipped a notch or three? Maybe not. Technically it could matter in terms of haircuts some people might apply bilaterally on treasury collateral. But the notion that either the Fed nor any large US clearing house would increase haircuts on Treasury collateral in the event of a downgrade — causing really financial plumbing mayhem — is unthinkable.
However, despite not arguably mattering, when S&P last downgraded the United States in August 2011 it prompted the worst single day fall in US stock prices since the (admittedly then recent) global financial crisis, made the then US Treasury Secretary Tim Geithner throw a bit of a public wobbly, and saw filmmaker Michael Moore calling on Obama to arrest the firm’s CEO. Someone hired a plane to fly past their rating agency’s offices dragging a banner proclaiming that they should all be fired, and a bunch of local governments terminated their business with the firm.
Meanwhile, and apparently unrelatedly, the Justice Department launched an investigation into the firm. Within a few weeks CEO Deven Sharma had left the company. When things moved from being just an investigation to an actual $5bn federal lawsuit for allegedly misleading banks about the credibility of its ratings before the 2008 financial crisis, S&P called this direct retaliation for their downgrade.
Still, as far as flouncing goes, Americans don’t hold a candle to the Italians.
Following Italy’s rating downgrades in 2011, prosecutors launched a criminal investigation against all three agencies which culminated in charges being filed against seven individuals at S&P and Fitch. The individual analysts faced jail sentences of 2-3yr and fines of up to €500k. Ultimately it took almost five years before an Italian court to acquit them of the charges.
We got in touch with one of the seven — David Riley, who was Fitch’s head of sovereign ratings and lead analyst on the 2011 Italian downgrade — to ask how it felt being on the wrong end of a large pointy stick being wielded by a disgruntled state. He told us that:
Being targeted by the state apparatus, even when wholly unfounded, is deeply uncomfortable. It is financially costly, your reputation is under attack and your liberty is potentially at risk. Rating analysts are never going to win any popularity contest, but when you incur the wrath of the state, criticism by market participants of how you are doing your job pales into insignificance.
Quite.
Rating agencies need sometimes to be the bearer of bad news. This week was not that week for the US.
While we’re sure that members of the Trump administration would react with maturity and solemnity to any downgrade, we can also see that being lead sovereign analyst with your name on the rating opinion might not be for the faint-hearted.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
MainFT:
WHSmith branded shops will disappear from UK high streets following a £76mn deal to sell the business on Friday.
The group will offload all 480 stores in town centres to Modella Capital, which also owns HobbyCraft in the UK, to focus on its lucrative international travel retail business, which accounts for 75 per cent of group revenue and 85 per cent of trading profit.
The WHSmith stores will be rebranded as TG Jones as part of the deal, the company said on Friday. The group’s travel stores in airports, train stations and hospitals will continue to trade under the WHSmith name, which has a 233-year history.
Understandably, the piece dwells on the deal itself, and the implications for both Britain’s high streets and one of its most visible mid-caps — its name derived from William Henry Smith, its founders’ youngest son.
But FT Alphaville, brainwormed, couldn’t get past that rebrand.
TGJones… what does it mean? Is it a reference to serene former Everton centre-half Thomas George “TG” Jones — who oddly enough ended up running a North Wales newsagent in later life?
Surely it couldn’t just be a vague concatenation of initials and surname designed to simply evoke WHSmith while remaining distinct?
Uh:
TGJones feels like a worthy successor to the WHSmith brand. Jones carries the same sense of family and reflects these stores being at the heart of everyone’s high street.
That’s a Modella Capital spokesperson announcing today’s deal. We asked them for more detail, and they told us:
The TGJones brand is not a reference to any individual. It’s obviously based on another familiar surname (like WHSmith), that will resonate with people across the UK, and we wanted to keep that sense of a family business.
Livingston, New Jersey (population 31,330) has always punched above its weight. Its residents have included Seinfeld’s Jason Alexander, my novelist brother Harlan, and Genovese crime family capo Ritchie “The Boot” Boiardo, who some say inspired The Sopranos. Its main landmark is the Livingston Mall, which opened to great fanfare in 1972 and has since slid into decline and is facing condemnation. I used to go there as a kid.
Livingston isn’t perfect, but it’s my hometown. So imagine my excitement when I saw that CoreWeave, an AI-infrastructure company whose headquarters are a 10-minute drive from my childhood home, was preparing a blockbuster IPO on Nasdaq, outshining Sand Hill Road’s darlings with a sky-high valuation.
But then reality struck like a pothole on the New Jersey Turnpike.
The IPO has now been downsized, the price range slashed, and the buzz has long faded. CoreWeave, a cloud-computing firm that rents out GPUs to AI companies, was supposed to be a marquee offering, proof that the IPO market was roaring back after years in the wilderness. Instead, it has become the latest exhibit in a troubling trend: IPO enshittification, where the public markets are offered the runt of the litter.
“Enshittification” is a term coined by journalist Cory Doctorow to describe how platforms and services decay over time. They start out great, enticing users with quality. Then, as profits take precedence, they degrade, squeezing customers, suppliers, and, eventually, themselves. His thesis focused on social media: once vibrant, now clogged with ads and algorithmic sludge. The same rot is taking hold in the IPO market.
There was never a golden age of IPOs, but some of the greatest companies went public early, rewarding investors willing to take the risk. The IPO marked not just a fundraising event but a cultural milestone, a corporate coming-of-age ritual, a chance to shine or stumble. An entire ecosystem — equity capital markets originators, syndicate desks, salesforces, research analysts, portfolio managers, buy-side analysts — grew around it, a symbiotic dance of capital and opportunity.
It wasn’t perfect but it was the best finance show in town.
Over time, the process has soured. Investment banks, eager to win deals, overpromise on valuations, inflating client expectations. This isn’t new, but it feels like it has become more pronounced. Meanwhile, the explosion of private capital, driven by low interest rates and other advantages, has made public markets less attractive. Companies no longer need IPOs to fund growth; they turn to them when they’re out of options.
CoreWeave isn’t alone in its struggles. Earlier this year, Venture Global, a liquefied-natural-gas exporter, tried to cash in on Europe’s energy crisis and excitement over Donald Trump’s election by seeking a nosebleed valuation. Investors weren’t fooled. The company reduced its valuation by more than 40 per cent to get the IPO out the door, only for the shares to plunge almost 60 per cent in the after-market. Like CoreWeave, it had glaring red flags: massive litigation, huge execution risks, and a valuation propped up by temporary price spikes.
These aren’t the kinds of companies that should be leading an IPO revival. Ideally, thoroughbred companies would lead the charge, much like Google’s 2004 debut following the dotcom collapse (the IPO priced below the range but traded well in the after-market) or AIA’s 2010 offering after the financial crisis. Instead, the market’s reopening features firms unable to secure private funding, desperate for cash to survive, or banking on investors overlooking their shortcomings in favour of hot trends.
The public markets risk becoming a dumping ground. When the best assets are hoarded by private equity firms, venture capitalists, sovereign-wealth funds, and family offices, the IPO market gets the leftovers. As FTAV wrote on Thursday, CoreWeave, for all its AI hype, has massive debts, huge capex requirements, mounting losses, rapidly depreciating assets, a slew of related-party dealings, and a significant dependence on just two customers (Microsoft and Nvidia). Yet here it was, looking for public investors willing to take the plunge. CoreWeave is seeking public investment not from a position of strength, but out of necessity.
The same pattern played out with WeWork and other cautionary tales — companies that didn’t go public because they were ready but because they had no other choice. The IPO market is ostensibly the showcase for the best and brightest. Now, increasingly, it’s the venue for the desperate and the distressed, a place where overhyped, overleveraged, and overrated companies try to hang on long enough for insiders to exit.
This shift isn’t just about a few bad listings; it reflects a fundamental realignment of capital flows. Private markets have ballooned, while the number of public companies in the US has roughly halved since the 1990s. Startups no longer need to go public when they can raise billions from private sources. By the time they reach the public markets, the easy money is gone.
If CoreWeave and Venture Global represent the vanguard of the IPO revival, we’re in trouble. Public markets should be a launchpad for great companies, not a last resort for troubled ones. The only hope is that enough high-profile flops will force a reckoning, steering investors back towards quality — or at least rational pricing. After all, private shareholders can’t hold on forever. Their own backers are desperate for liquidity, unsold assets are piling up, and the cycle of secondary buyouts, continuation funds, and other financial contortions won’t last indefinitely. Sooner or later, something has to give. When it does, companies will need to come to market with sustainable valuations and capital structures, rather than constantly pushing the limits.
As the fluorescent lights flicker over empty stores, Livingston Mall has gone from representing suburban aspiration to memorialising the decline of in-person shopping. The IPO as a product offers a similar spectacle of decay and lost promise: from a blue-ribbon event in front of cheering throngs to a tired lounge act playing to an indifferent crowd.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Well, there it is:
CoreWeave is planning to slash the size of its initial public offering and bring in Nvidia as an anchor investor, another sign of wavering investor demand for artificial intelligence infrastructure on Wall Street.
The cloud computing provider will formally set the price of its shares later on Thursday and is expecting to pare back its offering to around $1.5bn, according to people close to the matter.
CoreWeave had initially targeted raising $4bn and dropped that figure to $2.7bn when it began a roadshow to generate interest for its shares last week.
No official details yet on float pricing and structure, including the size of Nvidia’s anchor, so things could still change. CNBC reported earlier that Nvidia’s fresh backing of CoreWeave would involve a $250mn order, presumably in addition to the $320mn of server time it agreed to buy in April 2023.
We write at length elsewhere about how reliant CoreWeave is on Nvidia, its sole GPU supplier, 5.97 per cent shareholder and second-biggest customer. We also mention how hard it’s been for CoreWeave’s team of 14 IPO advisers to convince the buy-side that its debt-burdened business model is sustainable.
On the one hand, bringing in Nvidia to shore up the IPO might be seen to deepen their relationship and guarantee early drops on new hardware that could provide a competitive advantage. On the other hand, it won’t make worries about concentration go away.
In an anonymous poll seen by FT Alphaville, RBC Capital Markets asked hedge-fund and long-only clients: “Does CoreWeave have a sustainable moat?” Ninety per cent voted no.
Here are a few of the clients’ explanations as to why:
Their moat is priority access to GPUs – that’s it
Capital/relationships are the barrier and won’t last
Near-term they have capacity which is needed but longer-term, no. Anyone can buy GPUs, put them into a cluster, and sell the capacity to larger players. Competing with the hyperscalers with deeper pocket books who are also doing this whole nother thing.
The business model is predicated on the scarcity of NVDA chips. If, and when, the market loosens a bit or a competing chip manufacturer ramps up, the need for their “conduit” business model will be less needed.
Equipment rental business with cost of capital being the only LT advantage . . .
In answer to “What is the least attractive financial aspect of CoreWeave’s financials?”, more than half of RBC survey respondents said “customer concentration” (meaning Microsoft and Nvidia). Respondents’ reasoning included:
CoreWeave’s largest customer [Microsoft] is publicly telling investors it no longer has any need for CoreWeave and will build its own datacenters from here on out
If this is truly ‘overflow’ capacity for MSFT, then this is a tough model to invest [in]
I don’t like that I would be investing in OpenAI by proxy and that feels like an investment that is a function of Sam Altman’s ability to raise capital, first MSFT, now SoftBank, then… Saudi Arabia? Further and further out the risk curve.
And under “What do you think investors are missing about the CoreWeave story?”, one money manager wrote:
NVDA is 15% of revs which they levered up to buy billions ($) of GPUs. Why does NVDA need to pay somebody to access their own GPUs? It is a gimmick to create competitive tension for GPUs outside of the hyperscalers to give NVDA pricing leverage. As big as CRWV is, it looks small relative to Stargate scale. Move downmarket will require customers hand-holding and features akin to a hyperscaler. That will be tough. In the meantime, the banks are racing to get the deal done and their bank loans refinanced with bonds before this story meets reality.
Official IPO pricing is due after the US closing bell, but it looks a lot like reality is already catching up.
Imagine a caravan maker. It sells caravans to a caravan park that only buys one type of caravan. The caravan park leases much of its land from another caravan park. The first caravan park has two big customers. One of the big customers is the caravan maker. The other big customer is the caravan maker’s biggest customer. The biggest customer of the second caravan park is the first caravan park.
Sorry, not caravans. GPUs.
As Tabby Kinder and Rob Smith wrote last week for MainFT:
CoreWeave . . . which leases computing capacity to tech groups building artificial intelligence models, is gearing up for the largest stock market debut of the year.
This week it revealed it was seeking to raise as much as $2.7bn in the share sale, valuing the business at $32bn. As the New Jersey-based group prepares to start an investor roadshow, it is attracting scrutiny for its huge debt burden, borrowing at high interest rates, and forthcoming maturities on billions of dollars of loans.
CoreWeave started out in 2017 as the side hustle of some traders at Hudson Ridge Asset Management, a defunct gas futures hedge fund. First it was an Ethereum miner that pivoted during the 2019 crypto crash to pay-per-hour 3D video rendering. The phrase “machine learning and AI” was added to CoreWeave’s blurb in November 2022, the same month OpenAI launched, and soon grew to consume the whole. Shortly after CoreWeave’s Series C funding round in May 2024, its website title changed from “The GPU Cloud” to “The AI Hyperscaler”.
MainFT’s coverage focuses on the Blackstone and Magnetar Capital-backed company’s $8bn of debt. The crux of the story is the WeWork-style mismatch between its assets and liabilities, along with some apparent carelessness around debt covenants:
CoreWeave . . . violated several key terms of a $7.6bn loan last year, triggering a series of so-called technical defaults.
[The company] disclosed in the exhibits to its IPO document that it had to ask its biggest lender Blackstone to amend the terms of the loan and “waive” these defaults in December.
While CoreWeave did not miss any payments under the loan facility, it made a slew of serious administrative errors, which stemmed from beginning to use the financing to expand into western Europe. This clashed with key terms that in effect restricted the debt’s collateral to the US.
But with CoreWeave due to price its IPO later today, there’s plenty more in the S-1 filing that deserves attention. Here’s a quick tour of other notable items.
The Nvidia thing:
Tim Bradshaw last year asked CoreWeave CEO Michael Intrator about the company’s reliance on Nvidia, its 5.97 per cent shareholder, key supplier and key customer. Intrator . . .
. . . batted off questions about whether prospective investors were concerned about backing a business that had raised capital from Nvidia, only to spend a significant portion of those funds on that company’s products.
“It’s such a crap narrative,” he said. “Nvidia invested $100mn. We’ve [raised] $12bn in debt and equity. It’s an inconsequential amount of money in the relative scale of the amount of infrastructure we’re buying.”
Crap narrative it may be, but let’s take a look at what the S-1 says about customer concentration:
We recognized an aggregate of approximately 77 per cent of our revenue from our top two customers for the year ended December 31, 2024.
And . . .
Our largest customer accounted for 16%, 35%, and 62% of our revenue for the years ended December 31, 2022, 2023, and 2024, respectively.
CoreWeave’s revenue was $1.9bn in 2024. Sixty-two per cent of $1.9bn is $1.18bn. That squares with its Microsoft Master Services Agreement (our bold):
In February 2023, we entered into a Master Services Agreement (the “Microsoft Master Services Agreement”) with Microsoft, pursuant to which we provide Microsoft with access to our infrastructure and platform services through fulfillment of reserved capacity orders submitted to us by Microsoft and as may be amended upon our and Microsoft’s mutual agreement. We have recognized revenue of $81 million and $1.2 billion for the years ended December 31, 2023 and 2024, respectively, pursuant to the Microsoft Master Services Agreement.
That leaves 15 per cent of $1.9bn, or $285mn. That’s not far off the 20-month number CoreWeave gives for its Nvidia contract:
In April 2023, we entered into a Master Services Agreement (the “Master Services Agreement”) with NVIDIA, a beneficial owner of more than 5% of our outstanding capital stock, pursuant to which we provide NVIDIA with our infrastructure and platform services through fulfillment of order forms submitted to us by NVIDIA. As of December 31, 2024, NVIDIA has paid us an aggregate of approximately $320 million pursuant to the Master Services Agreement and related order forms.
And since . . .
None of our other customers represented 10% or more of our revenue for the year ended December 31, 2024.
. . . it seems fair to conclude that CoreWeave’s second-biggest customer in 2024 was Nvidia — which makes the following line feel a bit incestuous:
[O]ur current customers have contractually specified our use of NVIDIA GPUs.
Much more on Nvidia later, but first . . .
The Core Scientific thing:
“We relentlessly and creatively explore additional opportunities to add power capacity”, says CoreWeave’s S-1. Nowhere is that better demonstrated than with Core Scientific.
Core Scientific is a publicly traded crypto miner that collapsed into bankruptcy protection in 2022 alongside its main customer, Celsius Network, whose founder/CEO Alexander Mashinsky last year pleaded guilty to fraud and market manipulation. (Core Scientific’s co-founder, the Viper Room nightclub co-owner and Fatburger promoter Darin Feinstein, stepped down as group co-chair in 2023.)
CoreWeave last year tried to buy Core Scientific. After its takeover proposal was rejected, CoreWeave announced several contracts to rent and modify Core Scientific’s rack space. At the 2024 year-end, Core Scientific’s data centres accounted for “more than 500MW” of CoreWeave’s approximately 1300MW of total capacity (72 per cent of which was not yet switched on).
Core Scientific, in a 2024 results presentation, says its contracts with CoreWeave last 12 years.
Core Scientific’s disclosures also reveal who funds the conversion. A footnote to the above graphic says CoreWeave is paying Core Scientific “up to $1.5mn per HPC [high-performance computing] MW of data centre build-out costs” to a value of about $750mn. In exchange, CoreWeave gets an up-to-50 per cent rebate on its hosting costs. A follow-on deal involves CoreWeave funding $104mn of capex for no hosting rebate; more on that below.
It’s hard to shake the impression that CoreWeave is sinking a lot of capital and wearing most of the risk. Core Scientific’s data centres will still be there long after CoreWeave’s chips are fried.
Yet the market gives Core Scientific an enterprise value of approximately 10 times EBIT — a deep discount to conventional real estate investment trusts, which probably reflects some uncertainty about its anchor tenant.
Meanwhile, CoreWeave’s syndicate of 14 IPO advisers had reportedly been aiming for approximately 15 times forward EBIT. So even if recent speculation proves accurate that the price range has moved down by around 20 per cent, it still looks pretty punchy.
The depreciation thing:
GPUs are quickly depreciating assets. Not only do they burn out, they’re constantly being superseded by new models. Massed Compute estimates value loss of 20 to 30 per cent a year. The investment case for an AI data centre hinges on the rental market growing fast enough to cover sunk costs before their hardware is obsolete.
Here’s how CoreWeave’s S-1 estimates the useful life of its property and equipment:
Technology equipment: 6 years
Software: 3-6 years
Data center equipment: 8-12 years
Furniture, fixtures, and other assets: 3-5 years
Six years in AI is an eternity. Nvidia’s server-grade V100 GPU cost around $10,000 in 2019 and can now be picked up for a few hundred dollars. It’s already four generations behind the times, with another generation due to arrive next year.
CoreWeave’s rapid expansion last year makes it a big bet on Hopper, Nvidia’s last-but-one architecture, which debuted in 2022. The S-1 doesn’t give a detailed breakdown of assets but says a majority of its GPUs use Hopper.
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Its expansion has been mirrored across the data centre industry, which has moved inside a year from a critical shortage of AI compute to a glut.
“I start to see the beginning of some kind of bubble,” Alibaba chair Joe Tsai told a conference this week. “I start to get worried when people are building data centres on spec. There are a number of people coming up, funds coming out, to raise billions or millions of capital.”
What’s probably happening is that hyperscalers are no longer compelled to sprint and establish competitive moats by training the biggest models, so don’t need to rent as much emergency capacity, while smaller operators are waiting to see where things land before committing funds. Here’s what Goldman Sachs (a CoreWeave IPO lead underwriter) says in a note dated March 24 that downgraded ratings and forecasts for several Taiwanese AI server makers:
‘Training’ server will remain the growth driver given the increasing need for computing power to upgrade advanced AI models, but the volume ramp up is slower than we previously expected due to the combined reasons of product transitioning and uncertainties of demand and supply. As the GPU platform is transiting to next generation in 2H25, shipment can potentially slow during the transition period. Uncertainties remain in production ramp up, given the complexity of full rack systems and there remains debates on the demand for intense computing power after the release of more efficient AI models like DeepSeek.
Nvidia doesn’t give list price for high-end data centre hardware like the H100, its 2022 flagship, but resellers tend to quote a price of around $30k. Renting one for an hour used to cost between $4 and $8. Now it costs as little as $1.
It’s difficult to know how aggressively CoreWeave is competing with rivals on price because of . . .
The contract length thing:
Over the past couple of years, CoreWeave has all but abandoned pay-as-you-go and moved its customer base on to take-or-pay contracts, billed monthly. The per-hour prices agreed are unlikely to match those quoted on its website, which haven’t come down much since the boom times.
The company’s S-1 gives a “weighted average” customer contract length of around four years.
Several of the S-1’s risk factors are about how contract pricing is unproven. It’s also, from the perspective of logic, all a bit challenging. Why would a company commit to a rental that’s not much shorter than the predicted useful life of the asset being rented? What do they get out of hiring a rapidly-depreciating GPU other than the ability to renegotiate mid-contract or walk away? Isn’t flexibility in the face of uncertainty the whole point of being asset-light?
And in the context of CoreWeave’s 12-year site leases and the recent switch of pricing model, what does a four-year “weighted average contract duration” mean in practice? Most of last year’s revenue came from Microsoft, which has commitments to 2030, and last year’s only other customer of note was Nvidia, whose biggest customer last year was Microsoft. As the FT reported last month, Microsoft has already pulled some business from CoreWeave “over delivery issues and missed deadlines”. (CoreWeave denied that contracts were cancelled.)
Assumptions of weak pricing power and high customer churn are premised on data centre compute being commoditised. Going by a recent RBC Capital Markets client survey, that seems to be the consensus view on the buy-side:
In terms of financials, CoreWeave’s operating expenses last year were 50 per cent tech/infrastructure (ie, buying stuff) plus 26 per cent for power, etc (ditto). Interest costs and writedowns were what turned its $324mn of operating income into a $863mn net loss. From those figures, it might be argued that customers have been making more use of its balance sheet than its cloud computing expertise.
The SPE thing:
You say “special-purpose entity” and people will automatically think Enron. They have no reason to here. CoreWeave’s S-1 makes clear it doesn’t use off-balance-sheet vehicles, as you’d expect. The company’s talk of monetising AI compute has only a superficial similarity to Enron’s pitch to make broadband a new asset class.
True, CoreWeave has raised most of its debt through a wholly owned special purpose vehicle, CoreWeave Compute Acquisition Co. IV LLC, which uses an undisclosed number of its parent company’s GPUs and services contracts as collateral. But it’s all relatively transparent. Even the technical defaults are disclosed, albeit it takes a dig through the ancillary docs and a trained eye to spot them:
Rob Smith’s highlighter work
We note the Enron echo only because analysts at DA Davidson have heard it too. Here’s an extract from their recent note:
The key for CoreWeave was the ability to secure $12B worth of loans in order to purchase $12B worth of data center capacity. CoreWeave took a $100M investment from NVIDIA, a $320M contract from NVIDIA to buy its capacity, and a multi-year deal with Microsoft to raise $1.6B of equity and $12.9B of debt commitments, mostly at 10-14% interest but up to 17%. This allowed CoreWeave to purchase 250,000 GPUs from NVIDIA (about $10B worth). We believe the ~$8B it spent on GPUs made it a 6-7% customer for NVIDIA.
How is this different from Enron’s Special Purpose Entities?
The previous description may have sounded familiar for investors in the early 2000s. Enron used Special Purpose Entities it created in order to offload assets and liabilities off its balance sheet and inflate its profits by generating revenue from these entities. In Enron’s case these SPEs were controlled by executives and were hidden from the public, where in CoreWeave’s case there are 3rd party investors and more transparency, though the impact to the balance sheet and profitability are reminiscent.
We believe this structure may continue to work as long as demand for AI continues to grow exponentially. As long as demand for AI grows faster than hyperscalers are able to build data centers, CoreWeave may be able to use the proceeds of the IPO, borrow more debt and continue the cycle. However, if Microsoft ceases to need overflow capacity and/or OpenAI is not able to raise the $11.9B it is committed to, CoreWeave’s growth path may not be sustainable.
Hmmmmm.
The Magnetar thing:
CoreWeave’s Nvidia relationship isn’t the only one with Freudian overtones. Here’s what the S-1 reveals about Magnetar, another co-owner and customer:
In August 2024, we entered into an agreement (as amended, the “MagAI Capacity Agreement”) with a fund managed by Magnetar (“MagAI Ventures”). Under the MagAI Capacity Agreement, we will provide certain portfolio companies of MagAI Ventures with a predetermined amount of cloud computing services at a pre-negotiated hourly rate. The specific amount of cloud computing services to be used by each portfolio company, if any, will be negotiated individually with each portfolio company, and will be subject to final approval by MagAI Ventures.
We received a refundable deposit of approximately $230 million in connection with the MagAI Capacity Agreement. Any consumption of cloud services by MagAI Ventures, including by their portfolio companies, under this arrangement is deducted from this deposit amount, with the unused portion refunded back to MagAI Ventures at the end of the term of the arrangement.
A fund operated by CoreWeave’s co-owner paying a $230mn deposit to CoreWeave might look a bit conflicted, but it’s not like CoreWeave’s an investor in Magnetar funds!
Wait, sorry, yes it is:
On June 14, 2024, we [CoreWeave] contributed an aggregate amount of $50 million to a fund managed by Magnetar (“MAIV”) in connection with MAIV’s purchase of shares of preferred stock in a private company.
The escrow thing:
Buried in CoreWeave’s “subsequent events* addendum is this paragraph.
In February 2025, the Company modified multiple lease agreements with a single landlord. The modifications changed the contracted power capacity, term, and contractual payments, and terminated the related escrow agreements. As a result of the modification, the Company will receive an additional 70 MW of contracted power capacity. The Company received a refund of $304 million of unused escrow funds previously included within other non-current assets, and expects to make approximately $1.7 billion of additional rent payments over the 13 year term of these leases.
The *single landlord” is Core Scientific, which refers to the follow-on deal in its results presentation. What’s odd here is the $304mn refund. For any company swimming in liquidity, it seems small beer.
The OEM loan thing:
Page 84 of the S-1 has the following breakdown of debt:
Term loan facility (4) is an interesting one. It’s a $1bn credit line from JPMorgan, mostly unsecured, that CoreWeave agreed in December.
Meanwhile:
The Company entered into various agreements with an OEM between February and December 2024 whereby the Company obtained financing for certain equipment with an aggregate notional balance of $1.3 billion as of December 31, 2024. Related to the financing agreements, the Company granted a security interest for the financed equipment. The agreements are accounted for as financing arrangements, with terms between two to three years. The financing arrangements have a stated repayment schedule over the term with effective interest rates between 9% to 11%. The Company did not incur any debt issuance costs associated with the financing arrangements. Interest expense for the year ended December 31, 2024 was $60 million.
From the above paragraph, only an expert in supplier-finance disclosures will follow who’s paying whose bills. What we can say is that “certain equipment” purchased is highly likely to be Nvidia chips, and that CoreWeave’s S-1 names Dell and Super Micro Computer as among its OEM partners. The term loan’s size and proximity to the financing agreement are further complications. Whatever’s going on, it’s another aspect of the business that might look uncomfortably circular.
Stuff like this doesn’t tend to get picked up because CoreWeave rents GPUs rather than, for example, caravans. The market for generative AI has been growing in a way that the market for towable holiday accommodation has not.
The internal economics of both industries are not dissimilar, however, particularly around mismatches between sunk capex, asset depreciation, contract lengths and uncertain returns. But maybe, if the caravan industry were as insular and interconnected as AI, it would have just as exciting a growth story to tell.
Karthik Sankaran is a senior research fellow of geoeconomics in the Global South program at the Quincy Institute for Responsible Statecraft.
European markets have faded to the background of the global news cycle lately, perhaps for obvious reasons. But a recent move shows why it’s dangerous to equate rising bond yields with market vigilantism.
Both the euro and European stocks rallied when incoming German Chancellor Friedrich Merz decided to suspend the debt brake his party had long championed, however problematically. This is best understood as investors’ realisation that Germany will probably use its extra fiscal space to boost both its capacity for deterrence and its neglected infrastructure.
In an annoying but unsurprising turn, some luminaries suggested that rising Bund yields meant markets were punishing Germany for abandoning its long-standing thriftiness. Such takes came from fiscal hawks such as Twitter debt scold Holger Zschaepitz and Dr. Lars Feld, a former head of the German government’s economic advisory council.
But this view failed an elementary test of market revolt against an allegedly unsustainable fiscal expansion. That’s because the euro appreciated as Bund yields rose.
To veterans of crises in emerging markets and the Eurozone, DEFCON 1 is only declared when rising yields come with a depreciating currency. This is the sign that followers of UK political economy (over)invoked during Elizabeth Truss’s brief sojourn in office, when the bond/FX market binary treated Britain briefly as a Kwasi-EM.
Conversely, rising yields and an appreciating currency are almost always an indicator of market confidence.
And from a broader perspective, the relationship between currency strength and bond prices captures investors’ broader views about the links between an issuer’s economic outlook and its creditworthiness.
If a bond’s price falls/yield rises when the economy’s cyclical prospects deteriorate, it’s a “credit product”, because the market thinks slower growth means the issuer’s is less likely to service its debt.
If a bond’s price rises/yield falls when the economy’s cyclical prospects deteriorate, it’s a “rate product.” The price increase suggests that it is considered one of the safest assets denominated in that currency, EVEN IF cyclical prospects for the issuer lead to a fall in revenues and a rise in spending. These developments would be considered negative for creditworthiness for any other issuer.
What makes a bond a rate product? Well, that’s largely the market’s read on the issuer’s power and resilience. A large country’s government, for example, has far longer horizons than a single firm. Certain governments’ liabilities have other desirable characteristics, detailed here. And rates products are, by and large, issued by countries with central banks that have earned some credibility with the markets.
This is an important distinction. If a bond falls into investors’ “credit” category, it’s seen as riskier, and that means it amplifies economic cycles. When a slowdown pushes yields higher (or gives it a higher spread relative to a comparable safe asset) that not only raises borrowing costs, but also exacerbates concerns about creditworthiness, creating a vicious circle. If a bond is grouped into the “rates” category, that dampens cycles — lower yields in a slowdown can ease debt service by permitting refinancing while stoking a renewed expansion of activity.
It might help to bring currencies back into the picture and ask a similar question that we have asked about bond markets — does a weaker currency act to stimulate activity or to constrict it?
The answer to this question illuminates another big divide. A weaker currency can constrict activity if a country owes a lot of debt in a foreign currency, or even if it has lots of external investors in its local currency market. (The latter group is more prone to run at the first sign that their assets are losing value versus their own liabilities.) Same goes if a country has lots of flighty locals who view currency weakness as a reason to pull money out of the banking system — do a capital flight, in other words. These are all times when currency weakness will constrict financing.
The economic problems can be compounded if a country has concentrated economic exposure to one productive sector that’s relatively less able to benefit from currency weakness. Consider, for example, the travails of Nigeria in the immediate aftermath of the US’s shale revolution. It helps to have the ability to flood the world with lots of different kinds of cheap exports when your currency weakens. A less varied export mix, or one that’s heavily dependent on foreign inputs, does not.
When a country’s currency weakens, it helps if it has two things going for it. The first is a low pass-through from FX to domestic inflation (which means the cheapness “sticks” in real terms); the second is a central bank that does not overreact to currency weakness by pushing interest rates so high that it fuels concerns about longer-term debt sustainability which then weaken the currency further. (Readers may want to look at the actions of Banco Central do Brasil in 2015 and 2024).
The lists above illustrate financial conditions that developing countries might aim towards — Getting To Rate Product, which might be the macro resilience equivalent of the political science concept of “Getting To Denmark.”
But one international co-ordination problem is that countries in the global south that have “gotten to rate product” have often taken a route that is looked upon with disfavour now (see Michael Pettis’s work).
This route involves accumulating reserves, running persistent trade surpluses, “exporting” persistent disinflationary pressures overseas, and implementing capital controls, among other things. But they’re at least externalising a portion of their adjustment costs, rather than being left on their own to fester in the “you’re so screwed” outcomes in the diagram below. And notably, their export of persistent disinflation might also have given bonds in developed countries more of the attributes of pure rate product, and, consequently, more fiscal space to deal with downturns, which was not always true in the 1980s. If only the wretched ingrates in developed markets chanceries realised that.
And here’s a tool to help you keep tabs on how all of this works (or not). Enjoy, and if you’re a policymaker, try to find your way to the happy places.
