The more you earn, the more you can lose! Amidst the AI computing power frenzy, how much "debt bomb" is lying behind CoreWeave (CRWV.US)?

Credit Strategist columnist Michael Levitt warns that investors in the emerging cloud provider CoreWeave (CRWV.US) are excited about the explosive growth in computing power demand but are overlooking the potential time bomb hidden in the company's balance sheet, which could threaten its survival. Concerns Behind Doubling Revenue: The More You Earn, the More You Lose CoreWeave recently released its second-quarter earnings report, which exceeded expectations. The data showed that the company's Q2 revenue increased by 112% year-on-year to $2.58 billion, with backlog orders exceeding $100 billion. The stock price rose 20% following the report, expanding its increase to 47% for the year. The market is clearly more focused on its growing backlog and the management's optimistic outlook for demand. However, the market has overlooked the equally alarming doubling of net lossesnet losses in Q2 widened from $290 million in the same period last year to $626 million. Levitt believes that the company's rapid growth obscures its highly leveraged financial structure, which requires increasing amounts of external capital. In an article on August 13, Levitt wrote: "These numbers depict a company with astonishingly high leverage that must perform a miracle to turn things around to survive." Debt "Heavily Burdened" According to the financial data disclosed by CoreWeave, the company's debt-to-equity ratio exceeds 800% (including long-term debt and operating leases), with a working capital shortfall exceeding $10 billion, and a quarterly interest expense of about $640 million. The risk factors section of its quarterly report spans 50 pages, highlighting the numerous operational risks it faces. CoreWeave is under immense repayment pressure: it will need to repay $20.6 billion in debt by 2030, which includes $4.4 billion for the remainder of 2026, $6.2 billion in 2027, $4.4 billion in 2028, $2.4 billion in 2029, and $3.2 billion in 2030. Even more concerning is that CoreWeave has at least $10 billion in operating lease obligations during this period. The company's annual interest expenses have exceeded $2.5 billion, which does not yet account for the $2.6 billion in new financing completed in August or the $1.2 billion borrowed from its revolving credit line. Levitt estimates that CoreWeave must generate or raise at least $10 billion per year to cover its financing obligations, not including daily operating expenses and substantial capital expenditures. Rising Financing Costs and Doubtful Ratings CoreWeave's latest $2.6 billion loan carries an interest rate of approximately 9.875%, indicating a significant increase in its capital costs. Levitt warns that as CoreWeave competes for financing with larger, higher-rated tech giants, future debt financing costs could reach 10% or even higher. Levitt also criticized rating agencies for being overly lenient in their ratings of CoreWeave, underestimating its financial risks. Currently, S&P Global Inc. rates it at B+, Moody's Corporation at Ba3, and Fitch at BB-, with some transactions supported by specific assets and clients even receiving higher ratings. Levitt stated that CoreWeaves reasonable rating should be between B- and CCC+ until it can prove profitability and reduce its debt burden. He wrote: "This company is far from a B+/Ba3/BB- rating. Its market value could evaporate overnight." Levitt believes that investors focus too much on CoreWeave's income statement and revenue growth while neglecting its balance sheet, cash flow statement, and footnotes in the financial statements. He indicates that this disclosed information reveals risks concealed by the company's rapid sales growth. The bond market has already issued stern warnings: CoreWeave's credit default swap (CDS) spreads surged to 855 basis points in July, implying a 50% probability of default over five years. Equity Financing May Be a Way Out Levitt suggests that CoreWeave should take advantage of its high stock price to sell as many shares as possible. While issuing new shares may dilute existing shareholders, this move would give the company an opportunity to pay off debt and reduce reliance on high-cost borrowing. He characterized CoreWeave as a financing-driven product of the AI infrastructure investment frenzy. While the company has received support from NVIDIA Corporation and investment firm Magnetar, its expansion has relied predominantly on debt rather than equity financing. This puts CoreWeave in a more vulnerable position than tech giants, who can fund data center construction with their own cash flow and borrow at much lower interest rates. Levitt warned that if investment in AI infrastructure slows down or if the industry builds more computing power than actual customer demand, the risks will escalate further. In such a scenario, CoreWeave may have to bear expensive data center and financing obligations while competing with larger companies that have more robust balance sheets. He stated: "The worst situation for a company is to become the most leveraged player in an overly expanded industry. And this is precisely CoreWeave's current predicament." Wall Street Analysts are Cautiously Optimistic At the same time as Levitt issued his stern warnings, Morgan Stanley on Wall Street maintained a cautious stance on CoreWeave. Morgan Stanley maintained a "market perform" rating on CoreWeave with a price target of $99, believing that strong demand for GenAI data centers exists, but high debt and customer concentration remain key constraints to valuation breakthroughs. The firm expects CoreWeave's free cash flow to remain negative until 2028, with debt projected to rise to about $38 billion by the end of 2026. Overall, Wall Street analysts have given CoreWeave a "moderate buy" rating, with an average price target of $136.48, representing a 30% increase from the latest closing price.