Updated: 1-CoreWeave stocks and bonds are expected to plunge this week due to interest rate concerns impacting artificial intelligence investments.

Paragraphs 7 to 13 add analyst commentary, financial and other details

Reuters, Oct 16 - CoreWeave CRWV.O's stocks and bonds both faced sharp weekly declines on Friday, highlighting investor concerns over the cloud computing company's $50 billion debt burden, which has spread across the entire artificial intelligence sector.

Backed by Nvidia, this company became a market focal point this week after the latest inflation data drove up market bets (link) on interest rate hikes, thus increasing the likelihood of rising borrowing costs for heavily indebted data center and artificial intelligence infrastructure businesses.

CoreWeave's share price plunged more than 15% this week, and in pre-market trading fell another 5%, marking its worst weekly performance in nearly two months.

"Rising inflation data triggered a sharp sell-off in CoreWeave, as its business model is heavily reliant on debt to bet on future data center demand," analysts at BCA Research said.

"While other technology companies are also sensitive to the pace and scale of AI adoption and application, overall they are much less sensitive to interest rates," they stated.

This sell-off provides a stark reminder that AI companies' reliance on debt is becoming a risk for investors, and it also punctures the belief that "core enterprises of the AI boom are immune to macroeconomic headwinds."

So far this month, CoreWeave's share price has dropped by about a fifth, wiping out nearly $9.6 billion in market value.

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Bond Market Turbulence

On Thursday, the yield on CoreWeave's U.S. dollar bonds maturing in October 2031 US21873SAG30=TE surged above 16% at one point. That bond's yield is expected to drop for the fifth consecutive week, down about 3 cents this week.

According to S&P Global Market Intelligence, the cost of credit default swaps (CDS) on CoreWeave's debt has soared above 1,000 basis points, a record high this week.

Investor worries over CoreWeave’s huge debt burden and distressed bond yields have had a knock-on effect, hitting rival Nebius Group (NBIS.O), whose stock is set for its biggest weekly drop in two months.

Even so, several analysts are not ready to throw in the towel. Analysts at Evercore maintained an "outperform" rating on CoreWeave shares.

"The market seems to be interpreting secondary market bond yield increases as evidence the business model is broken, but we don’t think that’s the case," they wrote in a research note.

Other analysts argue that the sharp drop in CoreWeave shares should not be seen as a sign of the end of the AI trade. "CoreWeave should not be seen as representative of the AI sector," said Tommaso Leodari, chief investment officer at Dubai-based hedge fund Index & Cie.

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