Not Revenue. Not Growth. Here’s What I’ll Be Watching When CoreWeave and Nebius Report This Week.
Key Points
Democrats' midterm wins, including governors-elect in Texas, Ohio, and Georgia who campaigned on data center moratoriums, sent both stocks sharply lower last week as investors weighed what the results mean for the AI buildout.
CoreWeave's heavy reliance on debt, with some bond yields topping 16% and default insurance costs surging, has amplified concerns about the sustainability of both companies' business models.
Analysts expect huge growth from both companies this week, but I think they need to beat those targets and show costs improving, and I'm more focused on what management says about construction and borrowing costs.
It's been a rough few weeks to own CoreWeave (NASDAQ:CRWV) or Nebius Group (NASDAQ:NBIS). Both stocks have lost close to half their value since early October. Both companies report earnings this week -- CoreWeave on Tuesday, followed by Nebius on Thursday -- that may have serious consequences for shareholders.
Here's what to know ahead of these critical releases.
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Why the midterm election hit CoreWeave and Nebius stock
While the stocks have been sliding for some time, last Tuesday's sweeping Democratic midterm victory led to a roughly 14% drop in less than a week as investors weighed what the results would mean for the AI build-out.
Democratic candidates across the country ran on platforms that promised to rein in data center building and increase oversight of the AI industry at large. It worked. The topic became a flashpoint and helped propel Democrats to victory in states where the build-out is in full swing.
Data center moratoriums were central campaign pitches for the governors-elect in Texas, Ohio, and Georgia -- key states in the AI buildout.
CoreWeave has six active sites in Texas. Nebius faces its own challenges in states like Pennsylvania, which has already tightened its permitting rules and has a full moratorium under consideration.
CoreWeave and Nebius debt load and borrowing costs
The election results were hardly the start of the companies' recent woes. They've just amplified concerns over the sustainability of their business models -- especially given CoreWeave's heavy reliance on debt financing.
This is an expensive business. Without the resources of the big tech hyperscalers like Meta (NASDAQ:META) or Amazon (NASDAQ:AMZN), CoreWeave has been forced to take on serious debt to fund its growth. The company currently carries $35.1 billion in on-the-books debt.
Concerns around the company's borrowing led the yield on some of CoreWeave's bonds above 16% as of last week. At the same time, the cost to insure those bonds against default skyrocketed.
Nebius, on the other hand, relies less on financing, carrying $8.5 billion. However, that could change. The company lined up a $3.5 billion loan facility from Citi in October, and Reuters reported that it was considering a high-yield bond sale, but ultimately passed.
And that was before the added risk of a data center construction slowdown.
What to watch in CoreWeave and Nebius earnings
Wall Street is expecting another big quarter from both companies. Analysts are looking for:
- CoreWeave: $3.55 billion in sales, or about 160% growth
- Nebius: $908 million, or about 500% growth
These are obviously extreme growth rates that any company would envy. I think both companies will have to overperform these targets while also showing costs are improving as a bare minimum.
Image source: Getty Images.
But I'll be paying more attention to what management says about construction and borrowing costs. What impacts will the election results have on the already planned projects? If any delays are expected, how will that impact cash flows? What is CoreWeave's plan if borrowing costs keep rising? Can it afford to borrow at 16% interest, and for how long?
And for Nebius, does its recent $3.5 billion credit facility signal it will need to rely more on borrowing than it has in the past? How will this impact its cash flows?
Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Meta Platforms. The Motley Fool has a disclosure policy.