Is It Time to Sell CoreWeave Stock? Nvidia CEO Jensen Huang Doesn't Think So.

CoreWeave (NASDAQ: CRWV) stock has had some trouble lately. From Oct. 12 to Oct. 16, it lost about 25% of its value -- not a pretty sell-off. CoreWeave's sell-off is due to spiking debt yields, which indicates that the secondary bond market doesn't think CoreWeave will be able to pay these obligations back. However, a major CoreWeave investor doesn't think this is a problem.

The investor? None other than Nvidia CEO Jensen Huang. Nvidia has been a major CoreWeave investor, and as of the second quarter, it held about 47 million shares. That's about 10% of CoreWeave's total float, so it's no small position. Huang isn't as concerned as some may think, as he told investors at an unrelated event that he's "optimistic, and their (CoreWeave's) cost of capital is actually decreasing."

So, the market thinks one thing, and the CEO of the largest company in the world, who is a CoreWeave investor and supplier, thinks another. Who is right?

Image source: Nvidia Corporation.

Spiking yields are a concern

This sell-off is due to secondary yield on CoreWeave's debt spiking to 15%. Most individual investors don't dip their toes into corporate debt, so this area may be a bit unfamiliar.

CoreWeave is a cloud computing provider, which means it provides AI-focused cloud computing services. It has several big-name clients, including Microsoft and Meta Platforms, and to serve these customers, it has to build a lot of computing power. Data centers and the equipment that goes inside them aren't cheap, and CoreWeave doesn't have a different core business to support them as the major cloud computing players do.

So, CoreWeave has to raise capital. It can do this in two primary ways as a public company: issue shares or issue debt. While CoreWeave's share count has risen, it has also issued a lot of debt.

These bonds are issued at a certain price and yield. So, CoreWeave will pay the bondholders an interest payment, just like a regular Treasury bond. However, this debt can also be traded on a secondary market. When investors get concerned that the company may not be able to meet its obligations, the price of the bond tumbles, causing the yield to rise.

CoreWeave's bonds are now starting to yield over 15%. That's a sign that the market doesn't believe that CoreWeave will be able to pay its debts. In fact, it's classified as "distressed debt," which is worse than "junk bonds." That's not a great place to be in, so what should investors do?

The people in the know aren't panicking

CoreWeave is currently an unprofitable company and is spending every penny it can get its hands on to increase its computing power. It's also growing revenue very rapidly, so it may be able to close the gap.

Huang's comments about CoreWeave's cost of capital going down point to how high the yields of its bonds are when they're issued for the first time. So, there is a mismatch between what the market believes and what creditors issuing the bonds believe. I think this is the key distinction here.

The market is currently bearish on all things AI, and is back to worrying about how much money is being spent on the AI build-out. CoreWeave's debt is one of the obvious places to sell off if you think the entire AI build-out thesis is in trouble. However, I think the market has it wrong, because all the AI hyperscalers have indicated full steam ahead, and that AI is still transforming how businesses are being run.

While I'm not racing to buy CoreWeave's debt, I'm also not bearish on it. As for CoreWeave's stock, if it can do exactly what it says it will do to meet the obligations of major deals it has signed, the stock should work out just fine. However, CoreWeave will eventually need to flip the probability switch.

Keithen Drury has positions in Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.