Another Tottering AI Data Center Play: Coreweave

Coreweave is a startup AI Data center play. It makes Oracle look downright healthy and athletic. While Oracle's legacy software business generates a lot of cash flow, Coreweave totally depends on external financing in the form of stock sales and debt. Moreover, Coreweave has exactly the same problem as Oracle, namely high customer risk. Coreweave's main clients are Microsoft, META, and OpenAI. Now Coreweave claims to have a $100 billion backlog. But the Devil is in the Details. No contract is valid if Coreweave cannot deliver power, GPUs, and space to fulfill them. And that is exactly the probem. Demand vastly exceeds supply with no relief in sight for years to come. Secondly, it is likely that OpenAI and Anthropic are issuing more compute requests than they actually need given their soft commitment contracts. So if you add up the backlog across all customers, it probably vastly exceeds real demand. 

These key fundamental factors are the same as in the case of Oracle. An AI data centre rack's total capex including servers can total $6 million versus $56,000 to $100K for a standard interconnection data centre or telecom hotel. So capex is astronomical for a large AI data facility. But the per rack power requirements of a telecom hotel average from 5Kw to 10Kw versus as much as 132kW for its AI counterpart. While the large Interxion 2 data center in Vienna consumes 40 megawatts, an AI data center with the same footprint could consume as much 400 megawatts or even more. So AI data center operating expenses are very high due to the immense amount of energy required and steadily increases power rates.

If we look at Coreweave, its gross margin is 65%. On the surface that looks healthy. But the company depreciates GPUs using linear five year depreciation rates. That is a stretch. When META estimated one of its Llama LLMs, it experienced 419 hardware failures during the 54 day estimation run with half due to heat. It is hardly likely in these environments that GPUs will last on average five years. A large language model has trillions of neural net parameters to be estimated. GPUs do massive parallel matrix calculations in this context. 

So my view is that the skyrocketing Coreweave debt plus uncertainty about its true losses are driving the stock price down. I am not alone in this assessment. Michael Burry, of Big Short fame, believes the real GPU depreciation rate is two to three years versus Coreweave's five year depreciation rule. He views Coreweave as dramatically underestimating its losses via optimistic depreciation rates. Burry is currently shorting the company and probably doing quite well given the downward stock trajectory. It is worth noting that Coreweave's debts total 3.5x its annual revenues. This is a severe burden for a company that has no positive operating cash flows.

Coreweave Net Debt Over Time

Coreweave Stock Price From IPO To Present


Comments

Post a Comment

Popular posts from this blog

The British Empire's Resilient Subsea Telegraph Network

Image
The British empire had largely completed its Red Line cable network by 1902. This network allowed news and messages to be delivered in a few minutes or several hours at most depending on the message queue's length. It spanned the globe and formed a network ring so traffic could be routed in the opposite direction in case of disruption. It was, as Dr. Michael Delaunay has argued, a highly resilient network. Besides the ring configuration, the network relied on multiple cables between any pair of given end points to ensure uptime. The British military believed it would be impossible for an enemy to cut enough cables on any route to sever all communications between any given pair of end points. The Committee of Imperial Defense concluded that 57 cables must be shut down to isolate the British Isles from the Red Line network. The figure was 15 for Canada and 7 for South Africa. The Empire was self sufficient in terms of manufacturing the components for a subsea telegraph cable and re...
Read more

The Short Life Expectancy of Starlink's LEO Satellites

Image
According to FCC filings Starlink shut down almost 500 Starlink satellites during the first half of 2025. The company had them reenter the atmosphere where they burned up. What is striking is that these satellites were all less than 5 years old. The general consensus is that LEOs have a life expectancy ranging from 5 to 8 years. Shorter than expected life spans for the satellites will hit Starlink's income statement hard by increasing network depreciation and replacement needs. However, Starlink has managed to lower its LEO's manufacturing costs down to $500K versus initial figures around $1 million. So these production economies of scale might offset some of the higher than expected depreciation. However, there are also rocket launch costs as well. It costs Starlink about $3 million to put a satellite into orbit. The Falcon 9 costs $67 million per flight and delivers 23 LEOs into low Earth orbit. As a private company Starlink financials are a bit of mystery. The company press ...
Read more

Southern Cross Subsea Cable Network Deploys Ciena's Granular Layer 1 Wavelength Product

Image
Southern Cross subsea cable system is implementing ODUflex, which is a relatively new ITU standard that allows granular Layer 1 bandwidth. No longer are we limited to 100G, 400G, and 800G for either subsea or terrestrial networks. Interestingly enough, Hauwei proposed the new standard and was its primary champion. All wavelengths consist of optical containers and ODUflex allows optical containers to be stacked at 1.25 Gps intervals. So you can lease 1.25 Gbps wavelength up to 400G in 1.25 Gbps increments. Note that port sizes are still 10G, 100G, 400G or 800G. So to access a 150G transmission rate the customer needs 400G intefaces. Ciena is one of the the vendors to implement ODUflex along with Hauwei. More details here: https://lnkd.in/dZvNbubc. It is worth noting that granular bandwidth is being implemented on the newer cables which Southern Cross owns like Next.  The commercial motivation is poor take up of 400G wavelengths. The only real customers for 400Gs are very big bandwi...
Read more