- CoreWeave stock plunged last week on fears about its debt as yields on its bonds surged.
- However, Barclays says the panic is overblown and the wider AI trade is likely fine.
- Analysts made a comparison to SVB, which collapsed in 2023 but did not cause a wider bank crisis.
CoreWeave's bond drama isn't a reason to panic about the health of the wider AI trade.
That's according to Barclays analysts writing in a note on Monday, adding that even if the neocloud infrastructure provider runs into more trouble, investors don't need to fret about more distress to come.
CoreWeave saw its stock plunge last week after the yield on some of its bonds surged to 15%. Yet, Barclays' global research chairman Ajay Rajadhyaksha writes that investors shouldn't be worried, drawing parallels to another major market event that rattled investors, but ultimately proved to be contained in its lasting impact.
"In 2023, markets extrapolated regional bank issues to the US economy," he wrote in a note to investors, referring to the troubles that ultimately took down Silicon Valley Bank in the spring of that year. "It was a mistake. Similarly, investors shouldn't extrapolate recent challenges for CoreWeave debt to a view on the entire AI capex cycle."
The unexpected collapse of Silicon Valley Bank drummed up fears of a wider banking crisis, with investors concerned about a potential for cascade of bank failures sending shockwaves through the financial system.
While spasms in regional bank stocks persisted for weeks, broader fears were ultimately overdone.
"The mistake was in extrapolating from a small, volatile, structurally vulnerable instrument to the entire US economy," he said, adding that investors' barometer for stress, the SPDR S&P Regional Banking ETF, "was catastrophically wrong as a signal about what came next."
Rajadhyaksha added that the same scenario could be unfolding now, with investors fretting over CoreWeave's bonds and rising borrowing costs as companies continue to fund their AI spending with debt.
"CoreWeave's unsecured bonds are a tiny slice of CoreWeave's capital structure," he said. "CoreWeave's capex is a tiny slice of total AI CapEx. And the hyperscalers doing the vast majority of the spending don't finance it the way CoreWeave does."
Importantly, Rajadhyaksha also argues that the broader trade will likely be fine even if CoreWeave stumbles further.
"So in the most extreme bear scenario — CoreWeave stops spending entirely — we lose about 4-5% of total AI capex. If its spend merely halves, which might be a more realistic downside, the impact is 2%. On a trillion-dollar-plus 2027 estimate, that's $20bn. Not nothing. But not the cycle."
Then there's the issue of the market's "backstop," in this case the biggest AI spenders, which continue to ramp up spending projections and point to resilient demand for compute.
"The AI CapEx cycle does have its own version of a backstop: the fact that Alphabet, Microsoft, Meta, and Amazon collectively need more compute than currently exists," he said.
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