CoreWeave (CRWV) has an issue that most IT businesses would certainly kill for.
Demand is flooding in.
The artificial intelligence cloud provider ended the second quarter with almost $104 billion in sales backlog as corporations scrambled to obtain the processing power required to build and operate ever more advanced AI models.
Even that enormous sum could not cover everything that was coming in.
CoreWeave said it gained more than $25 billion of net new customer commitments at the start of the third quarter and also grew its contractual power capacity to around 4.2 gigawatts.
The potential is huge. So is the bill.
CoreWeave has $35.6 billion in debt as of June 30, as it spent extensively on data centers, electricity, and Nvidia (NVDA) graphics processing units.
The company’s net interest cost was $640 million for the second quarter alone.
That leaves Wall Street with a concern that might decide where CoreWeave stock goes next: Can its phenomenal AI growth outpace the expense of funding it?
UBS’s Karl Keirstead thinks investors may be overly negative about the solution.
The analyst initiated coverage with a Buy rating and a $120 price target, stating the greatest issue hovering over CoreWeave shares may be nearing its top, reported MarketWatch.
CoreWeave’s AI growth comes with a massive financing bill
Wall Street’s wildly varied views on CoreWeave may be traced to the company’s most recent financial performance.
Revenue in the second quarter soared 112% to $2.58 billion from $1.21 billion a year earlier, reported The Wall Street Journal. Adjusted profits before interest, taxes, depreciation, and amortization more than quadrupled to $1.51 billion from $753 million.
Revenue backlog reached approximately $104 billion as of June 30. CoreWeave said that figure didn’t include more than $25 billion of net new customer commitments added early in the third quarter.
Along with these pledges, its physical infrastructure is growing significantly.
CoreWeave added about 500 megawatts of active electricity in Q2 to around 1.5 GW. Power contracted to about 3.7 GW at quarter-end, before rising to over 4.2 GW on Aug. 11.
Another interesting data item came in September from the corporation.
CoreWeave said in a Sept. 17 company update that short-term customer contracts signed during the third quarter were priced at roughly $40 million per megawatt, calculated by dividing annualized revenue by the power needed to service the related clusters.
Those figures help explain why investors are interested in CoreWeave.
But there’s another set of statistics that explains why they’re scared.
CoreWeave’s revenue is growing fast, yet it reported a $626 million net loss in the second quarter. Net interest cost was $640 million compared to $267 million a year ago.
In its second-quarter Form 10-Q filed with the SEC, CoreWeave on June 30 disclosed total indebtedness of $35.6 billion.
CoreWeave also said it had $4.4 billion in principal payments due for the rest of 2026 and another $6.2 billion due in 2027.
“We respect the concerns (primarily leverage/credit risk) but conclude that they’re peaking,” Keirstead said, according to MarketWatch.
CoreWeave acknowledges debt risks. In its second-quarter Form 10-Q, the company warned that its high debt could make it more vulnerable to economic and industry changes, make it harder to raise capital, and divert cash flow to debt payments.
Its SEC filings caution that high levels of borrowing might restrict its capacity to get new financing, reduce cash that would otherwise be available for the firm, and raise its exposure to unfavorable economic and industry circumstances.
That makes for an odd investing equation.
CoreWeave doesn’t have a problem finding clients. Instead, it has to raise huge quantities of capital to create infrastructure quickly enough to meet them while producing enough future cash flow to support that financing.
UBS believes that the market may be too focused on one side of the issue.
Related: Bank of America tweaks CoreWeave stock forecast after earnings
CoreWeave also has been trying to modify the economics of how company funds its growth.
The business in March concluded a $8.5 billion non-recourse delayed-draw term loan arrangement secured by high-performance computing infrastructure and a related customer contract.
The facility got an A3 rating by Moody’s and an A (low) rating by DBRS. Those ratings were on the financing arrangement, not on CoreWeave’s overall credit profile as a corporation.
That’s an important difference.
CoreWeave has not removed itself from the financial risk that accompanies its growth. But the ability to finance particular infrastructure against contractual customer demand provides it with another route for financing development beyond standard corporate borrowing.
UBS sees CoreWeave stock climbing to $120
Keirstead began coverage of CoreWeave with a Buy rating and a $120 price target on Sept. 23.
The target implies around 38% upside from CoreWeave’s close of $86.76 on Sept. 22.
He’s conceding that financial danger exists for CoreWeave.
UBS believes that market fears over debt and credit risk are peaking, while the fundamentals for AI computing demand remain robust.
A particularly crucial piece of the argument is how much money CoreWeave can make from its power capability.
Keirstead estimates CoreWeave currently generates roughly $11 billion in revenue per gigawatt and expects that figure to eventually exceed $15 billion as GPU pricing and computing economics improve, according to a Barron’s report.
For a firm that spends billions of dollars securing electricity and building data centers, that shift might be huge.
This would dramatically increase the income per gigawatt, allowing CoreWeave to improve the economics of its infrastructure without just adding additional physical capacity.
UBS also expects demand for AI infrastructure to broaden progressively from frontier AI labs that fueled most of the industry’s early development to more typical business clients.
That matters because CoreWeave is very reliant on a few of clients.
UBS said its three biggest clients account for almost 72% of its revenue.
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CoreWeave has been seeking to expand that client base. The corporation said in the first quarter that it had struck several deals with Meta, including a fresh $21 billion commitment.
It has secured a multiyear deal with Anthropic to provide the infrastructure for the development and deployment of its Claude models.
Jane Street subsequently committed approximately $6 billion to CoreWeave’s AI cloud platform and separately invested $1 billion in the company at $109 per share.
CoreWeave has also expanded beyond the largest technology and AI enterprises.
Biotechnology data platform Harell Data said on Sept. 23 it has entered a multi-year deal to utilize CoreWeave Cloud for AI model training, fine-tuning, and inference.
The workloads will run on Nvidia A100 and Hopper GPUs. Harell’s technology is intended to enable models to deal with proprietary scientific datasets without the need to extract the underlying data.
No financial details were revealed.
One enterprise agreement won’t eliminate CoreWeave’s customer-concentration problem.
But technology, financial services, and biotech transactions underscore the wider premise of corporate demand behind UBS’s prediction.
CoreWeave’s $4.2 billion deal puts debt back in focus
CoreWeave’s new funding highlights the strain underlying UBS’s positive prediction.
The business also closed a $4.2 billion issuance of 2.875% convertible senior notes due 2033 after the buyers fully exercised a $500 million option. The notes have an initial conversion price of around $97.85 per share.
That comparatively modest coupon stands compared to some of CoreWeave’s current borrowings. Its June filing indicated various delayed-draw term facilities with effective interest rates between around 9% and 15%.
Convertible debt also carries the danger of shareholder dilution. CoreWeave has undertaken around $566 million in capped-call transactions intended to offset that effect under certain situations.
But nonetheless, big businesses are pouring resources into CoreWeave.
The startup raised $2 billion from Nvidia in January at $87.20 a share. The firms also want to speed up the building of over 5 GW of AI plants by 2030.
That leaves investors to grapple with two contradictory facts.
CoreWeave has $35.6 billion debt and high financing costs. However, quarterly revenue doubled, backlog reached $104 billion by June, and more than $25 billion in customer commitments followed early in the third quarter.
UBS’s $120 target rests on the premise that investors are overplaying CoreWeave’s financial burden and underplaying the economics of its rapidly developing AI infrastructure.
The question now is whether CoreWeave can turn that extraordinary demand into revenue fast enough to outrun the cost of financing its growth.
Related: JPMorgan backs CoreWeave’s pricing play as a bear digs in