The company at the heart of the AI bubble
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode dives deep into CoreWeave, a crypto-mining-turned-AI-infrastructure company that sits at the heart of the current AI boom and potentially its bubble. (01:15) Host Eli Patel interviews Verge senior reporter Liz Lopatto about her extensive investigation into CoreWeave's origins, financials, and its unique relationship with NVIDIA. The conversation reveals how CoreWeave went from mining Ethereum in New Jersey to becoming a $50 billion public company that leases NVIDIA GPUs to major AI companies like Microsoft, Meta, and OpenAI. (02:20) However, the story uncovers complex financial maneuvering, circular funding arrangements, and a troubling dependency on NVIDIA that raises serious questions about the sustainability of the AI infrastructure buildout.
- Main Theme: CoreWeave represents both the promise and peril of the AI boom, serving as a case study for how creative financing and risk-shifting might be masking fundamental problems in AI economics.
Speakers
Eli Patel
Editor-in-Chief of The Verge and host of the Decoder podcast. Patel leads The Verge's coverage of technology, policy, and their intersection with culture and business.
Liz Lopatto
Senior reporter at The Verge specializing in AI, finance, and technology business models. She has extensive experience covering complex financial arrangements and tech industry trends, and is currently working on a major investigative piece about CoreWeave.
Key Takeaways
The "Picks and Shovels" Strategy May Be Riskier Than Direct AI Investment
Many investors believe investing in AI infrastructure companies like CoreWeave is safer than betting on AI companies directly. (04:02) However, Lopatto's investigation reveals that CoreWeave has minimal competitive moats compared to traditional cloud providers like Amazon Web Services. While AWS offers comprehensive software services and infrastructure management, CoreWeave essentially just leases out NVIDIA chips with basic connectivity. (06:10) This means CoreWeave competes primarily on price and energy access, making it vulnerable to both larger tech companies building their own data centers and potential oversupply in the market.
Circular Financing Creates Artificial Demand in the AI Ecosystem
The AI industry is riddled with circular financing arrangements where companies invest in each other and then pay each other for services using the same money. (28:39) Microsoft invests billions in OpenAI, which then pays Microsoft for computing services. Similarly, CoreWeave gives OpenAI $350 million in company stock while OpenAI has a $22 billion contract with CoreWeave. (29:52) While this creates the appearance of robust demand and revenue, it's essentially "passing around the same $5" and may not represent genuine market validation of AI services.
NVIDIA's Strategic Control Through Financial Backing
NVIDIA has positioned itself as both CoreWeave's primary supplier and financial backer, creating an unprecedented arrangement where the chip supplier guarantees demand for its customer's services. (11:23) When CoreWeave's IPO faltered, NVIDIA bought shares and promised to purchase any excess compute capacity that isn't sold to customers. This arrangement gives NVIDIA significant leverage over major tech companies like Microsoft and Amazon, as it can influence data center capacity and maintain its chips as the default standard for AI workloads. (35:15)
Debt-Fueled Growth Model Relies on Rapid AI Adoption
CoreWeave pioneered a new financing model where NVIDIA GPUs serve as collateral for massive loans, but this creates a critical timing problem. (19:20) The company has taken on enormous debt across multiple instruments - chip loans, revolving credit lines, vendor financing, and secured loans - all betting that AI will generate sufficient revenue before the chips depreciate or wear out. (22:53) If AI adoption follows a normal technology curve (like e-commerce taking 25 years to reach 25% of retail), rather than the explosive growth assumed in these debt structures, CoreWeave faces serious financial difficulties.
Special Purpose Vehicles Enable Risk-Shifting to Smaller Players
Major tech companies are using special purpose vehicles (SPVs) and companies like CoreWeave to shift the risks of AI data center construction away from their core businesses. (15:28) This allows companies like Microsoft to maintain pristine credit ratings while still participating in the AI buildout. (17:42) If the AI boom fails to materialize, companies like Meta, Google, and Amazon can absorb losses through their other profitable business lines, while specialized AI infrastructure companies like CoreWeave have no fallback options. (33:18)
Statistics & Facts
- CoreWeave owns more than 250,000 NVIDIA chips and exclusively uses NVIDIA hardware, making it entirely dependent on a single supplier. (11:15) This massive chip inventory represents the backbone of their $50 billion valuation.
- CoreWeave has signed contracts worth tens of billions of dollars just in 2024, including deals with Meta and OpenAI, with OpenAI's contract alone worth $22 billion. (02:29)
- The company lowered its annual revenue forecast from $5.35 billion to an upper limit of $5.15 billion in its third quarter earnings, causing the stock to tank immediately after the announcement. (27:19)
