Investor concerns are starting to weigh on some artificial intelligence stocks, particularly those trading at high valuations and lacking fortress balance sheets to navigate what could become a very difficult environment if funding dries up and the AI trade hits a snag.
CoreWeave's (CRWV -11.91%) stock nose-dived nearly 15.5% on Oct. 14 on account of these concerns. The neocloud player has piled on debt to build out data centers to power the AI revolution. However, soaring bond yields have raised the cost of capital, leading investors to increasingly believe that capital markets for these AI stories could potentially freeze up, or at least make it more difficult to raise funding.
CoreWeave is projected to have a 6.3x gross leverage ratio by year-end, prompting market questions about the company's balance sheet.
Image source: The Motley Fool.
The "era of easy money" may be coming to an end
CoreWeave was one of the earlier, more notable neoclouds, which began building data centers specifically for the hyperscalers driving the AI revolution. Key customers include Microsoft, OpenAI, Meta Platforms, Nvidia, and Anthropic.
In just a few years, the company has brought 51 active data centers online that collectively can provide 1.5 gigawatts (GW) of compute. The company added eight data centers this year and has contracted roughly 4.2 GW of total power as of Aug. 11.
The problem is that building these data centers is extremely capital-intensive, forcing the company to raise significant debt to fund the build-out. At the end of the second quarter, the company had generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of nearly $2.7 billion.Meanwhile, total debt was $27.6 billion, compared with roughly $5 billion in total shareholder equity.
Looking ahead, Wall Street analysts project that CoreWeave will significantly grow its debt pile to $47.6 billion by the end of 2026, according to Visible Alpha. Projected adjusted EBITDA is expected to hit about $7.6 billion by year-end, giving the company a gross leverage ratio of nearly 6.3x.
CRWV CoreWeave
NASDAQ · As of 4:00 PM ET 10/16/26
The situation, coupled with a higher-rate environment, has led investors to sell CoreWeave bonds. For instance, according to Barron's, CoreWeave's 9.625% senior unsecured notes due in 2032 fell below $80, as of Oct. 14. Bonds are typically priced at par ($100) and have an inverse relationship with bond yields.
"The era of easy money, which we experienced in the first nine months of the year, is starting to disappear and dissipate," Luis Alvarado, co-head of global fixed income strategy at the Wells Fargo Investment Institute, said, according to CNBC. "Now the extra dollar or the marginal dollar is going to be more looked at with a microscope into the concessions that the issuer is giving you back."
Will the music stop?
The difficult part of evaluating any AI stock right now is knowing whether the proverbial music keeping the AI party going will stop.
At the end of the second quarter, CoreWeave reported a revenue backlog over $104 billion, 40% of which is expected to materialize within 24 months. In a memo, CoreWeave's CEO Mike Intrator wrote: "We are confident in our backlog, which more than supports all of our debt obligations."
According to Visible Alpha, consensus estimates from analysts project CoreWeave will drastically grow adjusted EBITDA to nearly $16.9 billion in 2027 and then over $27.6 billion in 2028. So, if current commitments with AI customers are met, then CoreWeave will be fine.
There are risks. For instance, Fitch Ratings noted in June that 65% of CoreWeave's first-quarter revenue came from its top two customers, although the company has since added more customers.But if these customers, for whatever reason, experience trouble, CoreWeave will feel it.
The frontier AI models right now have many commitments regarding data centers but are still losing lots of money. Even the hyperscalers, after committing hundreds of billions to AI infrastructure, have begun to generate negative free cash flow.
CoreWeave is already highly levered, so if there is real stress within the AI trade, it does not have a fortress balance sheet to protect it. That's why it's one of the riskier stocks in the AI trade than, say, hyperscalers like Microsoft.
