On Wednesday, shares and bonds of CoreWeave (ticker: CRWV) were sold off amid investor concerns that some tech companies have taken on excessive debt to build out AI infrastructure.
The AI computing cloud service provider known as Neocloud saw its stock price drop 16%, while the yields on its debt bonds rose significantly. The yield to maturity on its 9.625% coupon bonds maturing in 2032 reached 14.8%; the yield on its 9.75% coupon bonds maturing in 2031 was approximately 14.9%. Bond prices move inversely to yields.
Louis Alvarado, Co-Head of Global Fixed Income Strategy at Wells Fargo Investment Institute, said that investors were once eager to participate in the AI rally, but market sentiment has begun to shift.
He said that investors now demand higher risk compensation.
“The era of cheap capital we’ve been in is fading, as investors now scrutinize the risk-reward propositions offered by issuers with a magnifying glass for any new marginal capital,” Alvarado noted.
On Tuesday evening, Chamath Palihapitiya, founder and CEO of investment firm Social Capital and head of AI company 8090, posted on X, prompting a reply from Elon Musk, CEO of Tesla and SpaceX: "Yikes."
Parikhapitiya posted a chart of the 2032 bond, noting that its yield briefly reached 15% and closed at a new high on Tuesday. He also shared an excerpt from his article examining whether the AI infrastructure boom is fueling a private credit bubble, stating: “Lenders are charging an unusually low additional premium for AI-related risks.”
The technology sector is under pressure.
CoreWeave is not the only company affected by market concerns over AI-related debt burdens. For example, Oracle (ORCL) saw its stock price drop nearly 7% on Wednesday, and its bond yields also rose; its 6.25% coupon bond maturing in November 2032 is trading with a yield to maturity of 7.24%.
The overall technology sector weakened, with the Nasdaq Composite Index falling 1.4%. The impact of debt risks was most evident among technology stocks outside the "Magnificent Seven" that have weaker fundamentals.
Another new cloud sector company, NBIS, saw its stock price drop by 9%.
Companies are competing to build AI infrastructure and turning to the credit market to raise project funding, leading to a surge in bond supply. Dell's stock plunged 10%.
According to JPMorgan Asset Management data, major hyperscale cloud providers are expected to spend $800 billion on capital expenditures this year, with annual capex potentially exceeding $1 trillion by 2027.