CoreWeave's stock continued to fall. Why does Barclays think the panic is overblown?

Shares of cloud provider CoreWeave fell nearly 5% in premarket trading on October 20, and the company’s total losses since the beginning of the month have approached 30%. The decline in the stock price was driven, in part, by concerns about the company’s debt burden. However, analysts at Barclays believe the panic is overblown, and investors should not use CoreWeave alone as a barometer for the state of the entire AI market, according to Business Insider.

Investors should not extrapolate CoreWeave’s recent debt problems to the entire cycle of artificial intelligence capital expenditures, according to Ajay Rajadhiyaksa, head of global research at Barclays. He cited the example of how, in 2023, the markets extrapolated the problems of regional banks—which led to the collapse of Silicon Valley Bank—to the entire U.S. economy. “That was a mistake,” he said. Although volatility in regional bank stocks persisted for weeks at the time, the overall concerns ultimately proved to be exaggerated, according to Business Insider.

“The mistake was extrapolating data from a small, volatile, structurally vulnerable instrument to the entire U.S. economy,” the analyst noted, adding that the SPDR S&P Regional Banking ETF, which serves as a stress barometer for investors, “proved to be catastrophically inaccurate as an indicator of what would happen next” (the SPDR S&P Regional Banking ETF had lost 36% over the previous three months).

“CoreWeave’s unsecured bonds represent only a tiny fraction of the company’s capital structure. CoreWeave’s capital expenditures account for a tiny fraction of total AI capital expenditures. And the hyperscalers, which account for the overwhelming majority of these expenses, finance them differently than CoreWeave does,” the analyst explained.

The analyst asserts that the AI sector will most likely hold up, even if CoreWeave faces new challenges. “So, in the most pessimistic scenario, if CoreWeave were to completely halt its investments, we would lose about 4–5% of total capital expenditures on artificial intelligence. If, on the other hand, its spending simply halves—which is perhaps more realistic—the loss would be 2%. With [total AI capital expenditures] projected to exceed $1 trillion by 2027, that amounts to $20 billion. It’s a significant sum. But it won’t determine the fate of the cycle,” the strategist concluded.

In addition, Rajadhiyaksa noted that the market has its own “safety net”—the companies with the highest spending on artificial intelligence. They continue to raise their investment forecasts and report steady demand for computing power. According to the analyst, the cycle is underpinned by the fact that Alphabet, Microsoft, Meta, and Amazon collectively require more computing power than is currently available.

Yesterday, analysts at Goldman Sachs and Truist expressed their confidence in CoreWeave, recommending its stock as a buy. Overall, 33 of the 47 Wall Street analysts covering CoreWeave stock recommend buying it. Eleven of them recommend holding it, and only three recommend selling it.

Concerns about CoreWeave’s problems (its bond yields reached a level last week that typically signals financial difficulties), coupled with investor worries about the effectiveness of large-scale investments in artificial intelligence, led to a massive sell-off of AI-related stocks last week. As a result, last week was the worst since June for the Nasdaq Composite technology index and the broad-based S&P 500 index.

This article was AI-translated and verified by a human editor