CoreWeave’s Business Is Sound Despite Debt Fears, JPMorgan Says

(Bloomberg) -- Investor concerns over CoreWeave Inc.'s mounting debt and rapid cash burn are likely overdone, analysts at JPMorgan Chase & Co. said, given that rapid expansion is driving its financing needs rather than weak project economics.

Shares of the AI computing provider plunged about 20% last week as rising bond yields fueled concerns over its debt-funded expansion, contributing to a market-wide selloff. A Gartner forecast questioning whether AI revenue would be sufficient to support healthy returns on the industry's massive infrastructure investments exacerbated investor worries.

But CoreWeave's business model remains sound, JPMorgan equity analysts including Samik Chatterjee wrote in a Friday note, pointing to strong demand for computing power and long-term take-or-pay contracts that secure customers before new capacity comes online.

The analysts estimate that a typical five-year contract generates an unlevered internal rate of return in the mid-teens, exceeding the company's estimated blended cost of capital of 9% to 11%.

"Beyond the sound economics on a project for a typical 5-year contract agreement, there is an additional monetization lever in recontracting GPUs beyond the 5-year duration," the analysts added.

The company's contract economics also provide a cushion against debt risks. In a conservative scenario, capital spending represents about 51% of a five-year contract's value, with roughly 80% financed through asset-level debt, the bank said. After repaying that debt, CoreWeave could retain cash equal to about 16% of the contract value, enough to cover roughly five years of data center obligations even without renewing the contract.

That said, CoreWeave's aggressive expansion is expected to keep pressure on cash flow in the near term. The bank estimates that each gigawatt of fully operational capacity could generate $10 billion to $15 billion in annual revenue. Meanwhile, adding a gigawatt requires more than $35 billion in upfront capital spending.

"The cash burn is not a function of unfavorable economics per project but more of the capacity being ramped each year relative to the installed active capacity at this time," the analysts wrote.