Warning signs are flashing on the AI trade. Here's where to spot them
The AI boom is looking a little wobbly when it comes to all the borrowed money that's fueling it.
TL;DR
- Bond investors are becoming cautious about the AI boom, seeing potential weaknesses in the borrowed money fueling it.
- Historically, bond markets have been early indicators of trouble in major investment booms.
- Rising interest rates, driven by inflation from global events like the Iran war, are impacting borrowers, especially smaller AI compute companies ('neoclouds').
- Companies like CoreWeave, Crusoe, Nebius, Nscale, and Lambda are identified as 'neoclouds' that are more dependent on borrowing than larger tech firms.
- CoreWeave's bonds have seen significant price declines and rising yields, indicating distress.
- Credit default swaps for CoreWeave have jumped, showing increased investor concern about default.
- Public commentary from analysts and tech figures has drawn attention to CoreWeave's financial situation.
- Despite concerns, analysts generally believe AI demand remains strong, but weaknesses are likely to emerge in specific companies like CoreWeave.