WEBVTT - Monologue: High Noon for CoreWeave & AI

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<v Speaker 1>Zone Media. Finally someone let me out of my cage.

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<v Speaker 1>Welcome to this week's Better Offline Monologue, and I'm your

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<v Speaker 1>host ed ze Tron. We're approaching high noon for generative

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<v Speaker 1>AI and it's the true test of whether this industry

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<v Speaker 1>has that dog in it, and I believe it does.

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<v Speaker 1>But the dog in question is sick, covered in fleas,

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<v Speaker 1>and the swallowed a live grenade. Let me set the scene.

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<v Speaker 1>A few weeks ago, I reported that Microsoft had pulled

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<v Speaker 1>at least a gigawatt of planned compute capacity, according to

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<v Speaker 1>a report by analyst TD Cohen, equivalent to the entire

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<v Speaker 1>capacity of London or Tokyo. To be clear, the actual

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<v Speaker 1>figure was much much more than a gigawa but that

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<v Speaker 1>figure was the only one we had solid confirmation for

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<v Speaker 1>despite the press sitting on their hands not really covering

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<v Speaker 1>this number, they should have. A follow up report published

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<v Speaker 1>on March twenty sixth shed more light on the situation

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<v Speaker 1>and revealed that Microsoft has actually pulled over two gigawatts

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<v Speaker 1>of capacity across the US and Europe. That's the equivalent

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<v Speaker 1>capacity of London and Tokyo combined. Were still t Cohenawson said,

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<v Speaker 1>and I quote the pullback on new capacity leasing by

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<v Speaker 1>Microsoft was largely driven by the decision not to support

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<v Speaker 1>incremental open ai training workloads. In other words, this is

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<v Speaker 1>as I have predicted, Microsoft not only pulling back from

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<v Speaker 1>generative AI, but walking away from supporting open AI's future

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<v Speaker 1>expansion efforts. These efforts, i add, were a major driver

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<v Speaker 1>behind Microsoft's massive multi billion dollar CAPEX spend, which was

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<v Speaker 1>forecast to surpass fifty billion dollars to eighty billion dollars

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<v Speaker 1>this year alone. For open ai to continue training their

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<v Speaker 1>future large language models, they'll have to rely on a

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<v Speaker 1>combination of whatever support Microsoft is still willing to provide,

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<v Speaker 1>their relationships with Oracle and other cloud providers, and of

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<v Speaker 1>course the Stargate Data Center project, which is contingent on

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<v Speaker 1>money coming through from SoftBank, who need to fund open

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<v Speaker 1>AI's forty billion dollar funding round, and their own eighteen

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<v Speaker 1>billion dollar contribution to Stargay and Gorway. If the subject

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<v Speaker 1>of my love this monologue, I mean open aiy is

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<v Speaker 1>dependent on them. As a reminder, core Weave is a

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<v Speaker 1>company that sells access to compute for training and running

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<v Speaker 1>generative AI models, and they're going public on March twenty eighth,

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<v Speaker 1>which is the data this monologue runs annoyingly. I can't

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<v Speaker 1>speak to how the stock will do. I'm not a

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<v Speaker 1>stock analyst. I will, however, say that Corewave is a

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<v Speaker 1>company burdened by multiple times its revenue and debt. And

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<v Speaker 1>they're a company that lost eight hundred and sixty three

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<v Speaker 1>million dollars in twenty twenty four, and according to the

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<v Speaker 1>Financial Times, they're also facing nearly seven point five billion

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<v Speaker 1>dollars in debt repayments by the end of twenty twenty six.

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<v Speaker 1>And they also don't appear to have any path to profitability.

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<v Speaker 1>And this IPO, it's it's not looking so good. As

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<v Speaker 1>of the morning of March twenty seventh, twenty twenty five,

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<v Speaker 1>which is when I wrote the script, corwe've planned to

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<v Speaker 1>cut the size of their initial public offering to around

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<v Speaker 1>one point five billion dollars according to Bloomberg, which is

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<v Speaker 1>down from the two point seven billion dollars or so

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<v Speaker 1>they plan to raise.

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<v Speaker 2>When a company goes public.

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<v Speaker 1>They usually are selling a bunch of stock to get

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<v Speaker 1>money into the company. Sometimes they do it just because

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<v Speaker 1>they want to make more money. Sometimes they want to

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<v Speaker 1>be a public company and take the fame of that,

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<v Speaker 1>or in this case, I believe because they're desperate and

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<v Speaker 1>they need whatever they can get. Now, this is problematic

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<v Speaker 1>for a number of reasons, chief being that the information

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<v Speaker 1>reports the Corweave's cash burn will be fifteen billion dollars

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<v Speaker 1>in twenty twenty five, which is up from six billion

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<v Speaker 1>dollars in twenty twenty four. None of these fucking companies

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<v Speaker 1>make any They just burn money. It's insane. Now, Corwave

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<v Speaker 1>has just over six billion dollars in available liquidity between

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<v Speaker 1>loans and the one point three billion dollars or so

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<v Speaker 1>in cash they have lying around, while they could borrow more.

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<v Speaker 1>Their largest seven point six billion dollar loan includes a

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<v Speaker 1>covenant that states that if the company takes on more debt,

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<v Speaker 1>it can only be used to pay that loan back,

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<v Speaker 1>which means that in order to meet Corwev's future capex

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<v Speaker 1>spending goals, they need to raise vastly more than fifteen

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<v Speaker 1>billion dollars, either through new debt or through selling new

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<v Speaker 1>equity to new investors, or as they're doing Viru's IPO.

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<v Speaker 1>One point five billion dollars is a drop in the bucket.

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<v Speaker 2>Not for me.

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<v Speaker 1>If you have one point five billion dollars and want

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<v Speaker 1>to give it to me, please email me at easy

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<v Speaker 1>at better offline dot com. I would love that money.

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<v Speaker 1>Please give me ten dollars. I don't fucking anyway. I'll

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<v Speaker 1>put this really simply, a good stable company going public

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<v Speaker 1>does not reduce the size of their initial public offering,

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<v Speaker 1>nor do they have multiple stories from the Financial Times

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<v Speaker 1>comparing to Enron or we Work.

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<v Speaker 2>Remember, an IPO is.

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<v Speaker 1>An opportunity to buy equity in a company before it

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<v Speaker 1>hits the public market. The price will, at least in theory,

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<v Speaker 1>continue to rise. It's the next best thing to being

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<v Speaker 1>an investor in the company. Facebook and IPO price of

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<v Speaker 1>thirty eight dollars and now at the time of writing,

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<v Speaker 1>there are over six hundred bucks. Pretty good, right, not

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<v Speaker 1>for core with Furthermore, if generative AI was this massive

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<v Speaker 1>growth industry that would usher in a golden age of

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<v Speaker 1>tech valuations, the company selling the literal fuel access to

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<v Speaker 1>the data centers to run generalyvai models would not be

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<v Speaker 1>the financial equivalent of an hr Geiger painting. It wouldn't

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<v Speaker 1>be buried in debt with obscene interest rates and restrictive comminance.

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<v Speaker 1>It won't be burning many times more than its revenue,

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<v Speaker 1>nor would it be beholden to a very small number

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<v Speaker 1>of companies for the majority of their revenue who can

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<v Speaker 1>and do walk away at any time, as Microsoft has

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<v Speaker 1>Corweave is not a healthy company. But wait, wait, wait ah,

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<v Speaker 1>I'm not a smart guy, all right, I mean, let

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<v Speaker 1>me just let me just tell you a story though,

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<v Speaker 1>because I learned about this thing. Do you ever hear

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<v Speaker 1>of a hedge fund called Magnetar Capital, I'll tell you

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<v Speaker 1>about them. In two thousand and six, Magnetar Capital got

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<v Speaker 1>involved in something called a collateralized debt obligation, which is

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<v Speaker 1>a way of packaging up a bunch of debts that

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<v Speaker 1>you could sell it like a financial asset, or even

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<v Speaker 1>gamble on whether it would succeed. A hedge fund wouldn't

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<v Speaker 1>buy a single mortgage, for example, but they may buy

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<v Speaker 1>something with hundreds or thousands of mortgages, maybe subprime ones,

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<v Speaker 1>I don't know. And it turns out that these things

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<v Speaker 1>were real bad because it made it hard to see

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<v Speaker 1>the actual risk of the loans that made up the bonds,

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<v Speaker 1>and because they were easy to sell. They encourage mortgage

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<v Speaker 1>companies to give mortgages to people who couldn't pay them

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<v Speaker 1>because they knew they could sell them onto investors and

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<v Speaker 1>wouldn't have to carry on the risk themselves. This in

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<v Speaker 1>turn created something called a let me just look at

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<v Speaker 1>a great financial crisis, which apparently was.

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<v Speaker 2>Bad for the economy.

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<v Speaker 1>Hey, what happened to magnetagh Wait what they're one of

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<v Speaker 1>the two companies providing loans to core Weave.

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<v Speaker 2>What the fuck? And they're the largest institutional investor.

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<v Speaker 1>That doesn't sound that doesn't sound good at what?

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<v Speaker 2>What? Just this fucking industry?

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<v Speaker 1>Every time I think this industry can't getting fucking stupid?

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<v Speaker 2>Pardon me, pardon me.

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<v Speaker 1>Well, at least they're not involved in any other major

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<v Speaker 1>deal in general of AI. Right right, wrong, wrong, so

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<v Speaker 1>fucking wrong. Over in Silicon Valley, Open ai is for

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<v Speaker 1>the third time close to finalizing a forty billion dollar

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<v Speaker 1>funding round led by soft Bank, And wouldn't you know it,

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<v Speaker 1>MAGNETARH Capital is in there too, according to Bloomberg, for

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<v Speaker 1>as much as one billion dollar, valuing the company at

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<v Speaker 1>an astonishing three hundred billion dollars. And I recently got

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<v Speaker 1>told about a term suicide round, and that term refers

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<v Speaker 1>to a time when a company gets such a high

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<v Speaker 1>valuation that any future investment is effectively impossible, because when

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<v Speaker 1>you're investing out a company three hundred billion dollars. You

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<v Speaker 1>need to see liquidity at some point. You need to

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<v Speaker 1>see a chance to sell it. And guess what, who's

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<v Speaker 1>going to buy this dog shit merchant company that burns

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<v Speaker 1>billions that the open a eye as a complete dog.

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<v Speaker 2>Yeah? What's weird about this deal?

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<v Speaker 1>I mean, other than the fact did so isn't actually

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<v Speaker 1>finalized and it's taken months and involves man capital and

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<v Speaker 1>it involves seemingly every side of the deal taking on debt,

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<v Speaker 1>is that it also isn't exactly forty billion dollars yet.

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<v Speaker 1>Bloomberg reports that SoftBank will actually invest seven point five

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<v Speaker 1>billion dollars into open Ai and provide another two point

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<v Speaker 1>five billion dollars from a syndicative investors, which is just

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<v Speaker 1>it sounds far fancy than this. It's just a group

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<v Speaker 1>of investors who invest together. The remainder twenty two point

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<v Speaker 1>five billion dollars soft Bank and the seven point five

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<v Speaker 1>billion dollars from a syndicate will come up some sort

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<v Speaker 1>of indeterminate time later this year, which is weird, Right,

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<v Speaker 1>It's okay, it's not that weird. What the funding rounds,

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<v Speaker 1>especially big ones, they're meet it out in tranches based

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<v Speaker 1>on performance. I've talked to a few vcs before I

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<v Speaker 1>did this, and they say that's that's normal. But it

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<v Speaker 1>is extremely weird that this is considered a forty billion

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<v Speaker 1>dollar round despite the fact that only ten billion dollars

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<v Speaker 1>appears to exist at this time. And I'm not being

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<v Speaker 1>facetious or joking here. SoftBank literally does not have the money.

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<v Speaker 2>To give open ai right now.

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<v Speaker 1>They have like thirty billion dollars in hash, which is

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<v Speaker 1>why they're not sending that much, and they're having to

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<v Speaker 1>take on loans as well. I'll get to that in

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<v Speaker 1>a minute. But nevertheless, it's also not obvious how any

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<v Speaker 1>of this works long term, because the entirety of the

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<v Speaker 1>generative AI boom appears to rest on open AI's ability

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<v Speaker 1>to continue raising capital. Let me explain. Microsoft neglected to

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<v Speaker 1>exercise twelve billion dollars of future capacity with core Weave,

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<v Speaker 1>which was quickly picked up by open Ai. According to

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<v Speaker 1>se around the same time, the company canceled plans for

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<v Speaker 1>future data center expansion referring to Microsoft here that would

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<v Speaker 1>have undoubtedly cost tens of billions of dollars. This heavily

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<v Speaker 1>suggests that Microsoft is pulling back from Generative Ai writ

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<v Speaker 1>large and that a large degree of their spend with

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<v Speaker 1>Coreweed was to support open ai services, which open aim

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<v Speaker 1>well now for the bill.

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<v Speaker 2>For for open.

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<v Speaker 1>Ai to pay that bill, they'll need SoftBank to give

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<v Speaker 1>them the forty billion dollars of fundank, which SoftBank is

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<v Speaker 1>on the hook for at least thirty billion dollars of

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<v Speaker 1>according to the information, which includes open AI's eighteen billion

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<v Speaker 1>dollar contribution to the Stargate Data Center project, to which

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<v Speaker 1>soft Bank also owes eighteen billion dollars for SoftBank to

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<v Speaker 1>give them this money. The information also reports that SoftBank

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<v Speaker 1>will borrow sixteen billion dollars in twenty twenty five and

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<v Speaker 1>eight billion dollars in twenty twenty six, which still does

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<v Speaker 1>not add up to the forty six billion dollars or

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<v Speaker 1>so they promised open Ai and I haven't even mentioned

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<v Speaker 1>the fact that SoftBank has also committed three billion dollars

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<v Speaker 1>a year in revenue to the Bullsheit agent product. Without

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<v Speaker 1>that money or further funding, open Ai will not be

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<v Speaker 1>able to pay core Wave. So now everything rests on

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<v Speaker 1>soft Bank, a company with a checkered reputation, to put

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<v Speaker 1>it mildly, and if they buckle, everything else fails, core Wave,

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<v Speaker 1>open Ai, all of it. I don't know how any

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<v Speaker 1>of this ends, but I'll tell you this, absolutely nothing

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<v Speaker 1>I'm reading suggests that there is any long term viability

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<v Speaker 1>in generative AI. Open Ai loses billions of dollars a

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<v Speaker 1>year and will have to pay core Wave, which also

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<v Speaker 1>loses billions of dollars a year and has obligations that

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<v Speaker 1>are many times in excess of its actual assets or revenue,

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<v Speaker 1>or at least what it will make from the public market.

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<v Speaker 1>To be, that's not gonna help that much. If any

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<v Speaker 1>of this made sense, Corewave would be the biggest IPO

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<v Speaker 1>of the last decade. And while I doubt that would

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<v Speaker 1>be the case, I promise to you that, regardless of

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<v Speaker 1>what happens, you're about to witness something historic. And I

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<v Speaker 1>want to say something. Some of you have given me

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<v Speaker 1>feedback said, like, this stuff's really like it's a little

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<v Speaker 1>much like there's a lot of numbers. It's not, it's

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<v Speaker 1>just very it's very ominous. When you see all these numbers.

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<v Speaker 1>I didn't get in. I'm not a financial journalist, or

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<v Speaker 1>I guess I am now, and I'm pretending to be one,

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<v Speaker 1>and it all seems like a lot, but it really

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<v Speaker 1>does come down to addition of subtractions sometimes with the

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<v Speaker 1>occasional multiplication. I failed a lot of mathematics in my time,

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<v Speaker 1>and British libel also stopped me really elaborating further at school.

0:11:25.679 --> 0:11:28.320
<v Speaker 1>But the point is I was never trained to do

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<v Speaker 1>any of this stuff. This stuff seems very monolithic, but

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<v Speaker 1>it really is much simpler. And the way you stop

0:11:35.080 --> 0:11:37.920
<v Speaker 1>these companies being able to fuck around is learning this stuff.

0:11:38.000 --> 0:11:40.120
<v Speaker 1>If you ever have any questions, go to the Better

0:11:40.200 --> 0:11:43.120
<v Speaker 1>Offline Reddit. I will happily help walk you through any

0:11:43.160 --> 0:11:45.599
<v Speaker 1>of this. It seems dense, but if we want to

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<v Speaker 1>change things, it starts with stopping this feeling like magic.

0:11:50.040 --> 0:11:53.040
<v Speaker 1>Stop it isn't black magic. They want you to believe

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<v Speaker 1>that they'll work this out, because if you think about

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<v Speaker 1>any of these numbers for even two seconds, it kind

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<v Speaker 1>of seems fucking stupid because it is just because they

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<v Speaker 1>say it's going to work out, it doesn't mean it well.

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<v Speaker 1>And I think that we are potentially about to see

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<v Speaker 1>something really shocking. I think we're about to see the

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<v Speaker 1>greatest mask Off Dunce moment in the economy. If AI bursts,

0:12:16.679 --> 0:12:19.079
<v Speaker 1>if the bubble bursts, you're going to see all these

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<v Speaker 1>people that said AI was the future, kind of walk

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<v Speaker 1>it back, kind of stop talking about it anytime they try.

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<v Speaker 2>Scream at them, scream at them, say what are you

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<v Speaker 2>talking about AI?

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<v Speaker 1>Like it was the biggest thing in the world, like

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<v Speaker 1>two minutes ago, Well are you talking about that?

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<v Speaker 2>Hey? Where's Ai? Didn't you say I was a I

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<v Speaker 2>was a big deal?

0:12:35.920 --> 0:12:39.440
<v Speaker 1>Hey Bob Iger, Hey what's happening with the AI ship?

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<v Speaker 2>And they're going to really try and aggressively walk this back.

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<v Speaker 1>Never ever let them forget what they've done here, Never

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<v Speaker 1>ever forget the terrible people holding up this spurious, spacious, destructive,

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<v Speaker 1>disgusting bubble. It's horrible. It will be horrible to watch

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<v Speaker 1>it collapse. I feel bad for our economy, but this

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<v Speaker 1>is tremendous content