To The Moon

A stock can fall sharply even when its underlying business opportunity remains intact. But when a company relies heavily on borrowing to fund its growth, investors have an additional question to consider: Will the returns from its investments be enough to cover the cost of financing them?

That’s the debate surrounding $CRWV (CoreWeave), the specialised cloud computing provider serving the growing demand for AI workloads.

According to a recent Dow Jones report, CoreWeave shares have fallen more than 50% from their May highs. Last week’s hotter-than-expected inflation data added to concerns that interest rates could remain elevated, increasing the cost of borrowing for capital-intensive businesses.

Yet Goldman Sachs analyst Gabriela Borges believes the market may be underestimating the potential improvement in CoreWeave’s returns while overestimating how much its cost of capital will rise.

Could this selloff be creating an opportunity, or are investors right to be cautious?

💰 1. The Finance 101 Lesson Behind CoreWeave

CoreWeave’s business model is relatively straightforward, but its financial structure makes it more complicated.

The company borrows money to acquire computing hardware and build data-centre infrastructure. It then rents that computing capacity to customers who need powerful systems to train and run AI models.

This approach allows CoreWeave to expand its infrastructure without relying entirely on existing cash reserves. However, it also creates substantial financing obligations.

The key question is whether the returns generated by its hardware investments exceed the cost of the capital used to fund them.

Consider a simplified example:

Imagine a company invests $100 million in computing infrastructure and earns an annual return of 15% on that investment. If its effective cost of capital is 9%, the investment generates a positive spread of six percentage points before considering other factors.

But if the return falls to 10% while the cost of capital rises to 11%, that spread turns negative.

These figures are illustrative, not CoreWeave’s actual financial results.

The lesson is that growth alone isn’t enough. The return on invested capital must justify the cost of financing that investment.

🚀 2. Why Goldman Sachs Sees Potential Upside

The bullish argument centres on two variables: the returns CoreWeave can earn from its infrastructure and the cost of financing that infrastructure.

According to the report, Borges believes investors may be underestimating potential upward revisions to the returns on CoreWeave’s hardware investments.

Why does that matter?

AI computing capacity remains a critical resource for companies developing and deploying AI applications. If demand continues to exceed available supply, providers with access to the necessary infrastructure may be able to generate more revenue from each unit of capacity.

Borges highlighted the potential for CoreWeave to increase revenue per megawatt of power capacity over the next 24 months.

If CoreWeave can generate higher revenue from its existing infrastructure while maintaining strong utilisation, the returns from its investments could improve.

That would help offset some of the pressure from higher financing costs.

However, this depends on continued customer demand, pricing power and the company’s ability to deploy capacity efficiently. A shortage today does not guarantee favourable pricing or utilisation indefinitely.

📈 3. The Interest-Rate Risk May Be Smaller Than Feared

The other side of the argument concerns borrowing costs.

Borges reportedly expects CoreWeave’s future debt to carry higher interest rates, but estimates the increase could be limited to around 100–200 basis points, potentially capping its blended borrowing costs at approximately 10%.

One basis point equals 0.01 percentage points, so an increase of 100–200 basis points means a rise of one to two percentage points.

If financing costs increase less than the market fears, while returns on hardware investments improve, the economics of CoreWeave’s business could be better than its falling share price suggests.

But there is an important distinction: a 10% blended borrowing cost is not the same as a 10% total cost of capital.

The company’s overall cost of capital also depends on its capital structure and the required returns demanded by equity investors. Operating expenses, depreciation, capital expenditure and other obligations also matter.

Investors therefore need to assess the complete financial picture rather than focus on one interest-rate estimate.

⚠️ 4. Why the Bears Still Have a Case

The bullish argument is interesting, but the risks should not be ignored.

First, leverage cuts both ways.

Borrowing can accelerate expansion when demand is strong, but it also creates obligations that must be met even if customer demand weakens.

Second, AI infrastructure requires continuous investment.

Computing hardware can become less competitive as newer generations arrive. CoreWeave must consider equipment upgrades, maintenance and the capital needed to keep its infrastructure attractive to customers.

Third, competition could weaken pricing power.

If other cloud providers expand their AI capacity, customers may gain more alternatives. That could put pressure on rental prices and reduce the returns CoreWeave earns from its infrastructure.

Fourth, the valuation still matters.

A stock that has fallen more than 50% is not automatically cheap. Investors must consider the company’s expected earnings, cash flow, debt obligations and future financing needs.

Even if the business performs well, the stock could struggle if expectations remain too optimistic.

🔍 5. What Could Trigger a Recovery?

For CoreWeave’s shares to recover sustainably, I would look for evidence that the financial story is improving.

📌 Improving returns: Is revenue per unit of computing capacity increasing, and are those gains translating into better profitability?

📌 Strong customer demand: Are customer commitments turning into actual revenue and cash generation?

📌 Manageable financing costs: Can the company fund its expansion without allowing debt and interest obligations to grow faster than its financial capacity?

📌 Better cash flow: Is the business becoming less dependent on raising additional capital to support its growth?

📌 A more reasonable valuation: Does the current share price adequately reflect both the opportunity and the risks?

These indicators would help distinguish a temporary sentiment-driven selloff from a more fundamental deterioration in the business.

🎯 My Take: The Opportunity Is Real, but So Is the Risk

I find the debate around CoreWeave particularly interesting because both sides have a reasonable argument.

The bears are concerned that a heavily financed business could struggle if borrowing costs rise and the returns on its infrastructure fail to keep pace.

The bulls believe the market may be focusing too heavily on financing costs while overlooking the potential for stronger returns from scarce AI computing capacity.

Ultimately, both arguments depend on the same financial relationship: how much CoreWeave earns from its infrastructure compared with what it costs to finance and operate it.

The next stage of the AI boom may not simply reward companies that build the most computing capacity. It may reward those that can turn that capacity into sustainable profits and cash flow.

For $CRWV, the critical question is whether improving returns can outweigh the risks associated with debt, competition and ongoing capital expenditure.

A recovery is possible, but it is not guaranteed. The recent decline could represent an opportunity if the business fundamentals remain strong, or a warning if financing requirements become harder to manage.

💬 Your Turn, Tigers!

After a decline of more than 50% from its May highs, how do you view CoreWeave?

A. 🚀 Bullish: AI demand could drive returns higher than the market expects.

B. 📉 Bearish: Debt and financing costs make the business too risky.

C. ⚖️ Wait and see: I want to see stronger cash flow and clearer evidence that returns justify the investment.

D. 💰 Watching the valuation: The business may have potential, but the entry price matters most.

Would you consider buying a capital-intensive AI infrastructure company after such a sharp selloff, or would you rather wait for confirmation that its financial model is working?

Disclaimer: This post is for sharing investment ideas and market perspectives only. It is not financial advice or a recommendation to buy or sell any security.