Speaker 1: Zone Media burd Up. I'm at Zetron and this is
Speaker 1: your weekly better offline monologue. So last week I put
Speaker 1: out a newsletter about core Weave, an a cloud provider
Speaker 1: that sells GPU compute to AI companies looking to run
Speaker 1: or train their models, and they recently filed the paperwork
Speaker 1: to go public. Now, the newsletter explained the shaky fundamentals
Speaker 1: of the business, which is putting it mildly and ask
Speaker 1: the question how the fuck does core Weave survive. This
Speaker 1: is a company that's drowning in debt and relying on one
Speaker 1: company for more than half of its revenue. And said company,
Speaker 1: Microsoft is actively pulling away from building new data center
Speaker 1: capacity and has reportedly pulled back from some contracts with
Speaker 1: core Weave, though it's not clear what those contracts are. Now,
Speaker 1: this is an important story and one that raises questions
Speaker 1: not just about the viability of core Weave, but the
Speaker 1: generative AI industry. At that said, the subject matter is
Speaker 1: a little dense to turn into a hulking two part episode,
Speaker 1: so I decided to condense it into a shorter monologue
Speaker 1: for you. Now, Core We've had intended to go public
Speaker 1: a week ago. They might go public and a week
Speaker 1: from now, and they're apparently going with like a twenty
Speaker 1: five to thirty billion dollar valuation. While it's hardly a
Speaker 1: recognizable name like say open AI or Microsoft or in Vidia,
Speaker 1: this company is definitely worth taking a look at, if
Speaker 1: not for the fact that it's arguably the first major
Speaker 1: IPO that we've seen from the current generative AI hYP bubble,
Speaker 1: and it's undoubtedly the biggest. Moreover, corwave is a company
Speaker 1: that deals in the infrastructure aspect of AI, where one
Speaker 1: would naturally assume is where all the money really is
Speaker 1: putting up service for hyperscals to run their hallucination pro
Speaker 1: and nonprofitable models. If in Vidia, the company that makes
Speaker 1: the GPUs for generative AI, is selling the pick axes
Speaker 1: for the current gold rush, cor we've well, they own
Speaker 1: the land, or maybe they're the shovels. I'm not going
Speaker 1: to get too far into that metaphors side up. Until
Speaker 1: a few years ago, Corweave was a different company, a
Speaker 1: cryptocurrency mining data center company to be specific. Now twenty
Speaker 1: tens were turbulent for crypto and the company then pivoted
Speaker 1: to providing high performance computing for third parties that didn't
Speaker 1: want to run their own infrastructure for things like three
Speaker 1: D modeling. Around the time of the launch of chair GPT,
Speaker 1: cor We've pivoted again, this time towards providing compute to
Speaker 1: hyperscalers and then generative AI interest. It gambled, and it
Speaker 1: gambled successfully. You'd imagine that such a company would be
Speaker 1: a thriving, healthy business though, right they I mean they
Speaker 1: sell the surfer architecture. The demand is there, the growth
Speaker 1: is there. I mean everyone wants generative AI. Right, it
Speaker 1: wouldn't be another thing where the reality Jesus Christ. Even
Speaker 1: a cursory glance at Corwey's financial disclosure documents reveals a
Speaker 1: business that's precarious at best, and in my most uncharitable opinion,
Speaker 1: it's utterly rancid. If this company was in any other industry,
Speaker 1: be seen as a big pile of shit, except it's
Speaker 1: one of the standard bearers of the generative AI boom
Speaker 1: and so exists within its own reality distortion field. Now
Speaker 1: Callw've makes its money by renting out GPUs to companies
Speaker 1: looking to run or train their models, which means that
Speaker 1: it's incredibly indicative of whether there's a real business in
Speaker 1: generative AI and you'll be shocked to hear that there
Speaker 1: isn't call. We've made just under two billion dollars in
Speaker 1: twenty twenty four, yet somehow managed to lose eight hundred
Speaker 1: and sixty three million dollars. Worse still, seventy seven percent
Speaker 1: of its revenue comes from two companies, Microsoft sixty two percent, and,
Speaker 1: although not said explicitly, most likely in Video fifteen percent.
Speaker 1: Now the information is reported Project Gosprey, which is basically
Speaker 1: Nvidia's stake in the fact that they're finaling money and
Speaker 1: it's actually not immediately obvious what it is that in
Speaker 1: Video is paying Core week four, though Invidio is both
Speaker 1: invested in the company and provides it with priority access
Speaker 1: to its chips. With Core, we've getting some products before
Speaker 1: even Amazon or Microsoft. It's bonkers. And again, yeah, I
Speaker 1: think with all this preferential accents Core, we've just printing
Speaker 1: money right versus burning it, burning it by the hundreds
Speaker 1: of millions full. I wish I could get this much
Speaker 1: money and just I don't know, I would be doing
Speaker 1: a far weirder podcast. It would be exactly the same thing,
Speaker 1: better offline would exist. I would just have hundreds of
Speaker 1: millions of dollars we'd have just like Samuel L. Jackson
Speaker 1: coming in for some episodes. Anyway, I don't have that money.
Speaker 1: If you'd like to give it to me, please please
Speaker 1: do now. A few weeks ago, The Financial Times reported
Speaker 1: that Microsoft had pulled out some of their core Weave contracts,
Speaker 1: though Core We've denied the allegations, and mysteriously, a week later,
Speaker 1: open Ai announced that they had an eleven point nine
Speaker 1: billion dollar contract with Corewave to provide compute services. Now,
Speaker 1: I can't say for certain. Can you think of another
Speaker 1: reason Microsoft needed a whole bunch of GPU compute other
Speaker 1: than to host open AI's models. Hmm, Now, I'm just
Speaker 1: guessing here, but one has to wonder if it wasn't
Speaker 1: so much open Ai se a new deal and more
Speaker 1: at taking over the future compute than Microsoft was formally handling.
Speaker 1: And yes, you're remembering correctly. Microsoft has recently canceled more
Speaker 1: than the gigawater future compute capacity, though from what I've heard,
Speaker 1: its core Weave contracts future or otherwise weren't included in
Speaker 1: that number. Anyway, For core Weave to make that eleven
Speaker 1: point nine billion dollars in revenue from open Ai, they're
Speaker 1: going to need compute, which will cost them tens of
Speaker 1: billions of dollars to build, which will be difficult as
Speaker 1: the company has burdened with about eight billion dollars of
Speaker 1: debt with horrifying interest rates, which made lead it to
Speaker 1: pay upwards of one point five billion dollars a year
Speaker 1: in loan payments, with one of them requiring Core Weave
Speaker 1: to repay the loan with any other debt they raise
Speaker 1: in the future. Core Weave, by my estimates, needs at
Speaker 1: least thirty billion dollars to expand. It has about one
Speaker 1: point three billion dollars in the bank and just under
Speaker 1: four billion dollars left on its loans that they can draw.
Speaker 1: One of them is a term loan where you can
Speaker 1: draw more up until about June twenty twenty five. Although
Speaker 1: Core We've will raise capital in its IPO, the amount
Speaker 1: will be anywhere near any to meet its needs. And
Speaker 1: when I say its needs, I mean like the ability
Speaker 1: to service the revenue that they need to spend more
Speaker 1: money really does not make a lick of sense when
Speaker 1: you think about it, and you may wonder if things
Speaker 1: can get worse, and the answer is that they can.
Speaker 1: Coreweave has planned one point three gigawats of expansion and
Speaker 1: its partner to build it is a public company called
Speaker 1: Core Scientific. Different company, similar name, genuinely different. Here are
Speaker 1: some facts about Core Scientific. They went public in twenty
Speaker 1: twenty two in a disastrous spack merger and then filed
Speaker 1: for bankruptcy in the same year. Their entire business has
Speaker 1: been focused on mining bitcoin, which requires specialized acic computer
Speaker 1: chips that are entirely different both in their construction and
Speaker 1: their maintenance to GPUs, and they can only really be
Speaker 1: used for mining crypto. They're not easily repurposed for other tasks,
Speaker 1: and indeed their data centers are not just a plug
Speaker 1: and play thing. You basically have to demolish them. And
Speaker 1: another thing about Core Scientific they only made twenty four
Speaker 1: million dollars twenty twenty four from selling AI compute related
Speaker 1: services to their customers. That's around five percent of its
Speaker 1: total revenue, with the rest coming from mining and selling crypto.
Speaker 1: Also really dumb ass mistaken. Just make that I said customers,
Speaker 1: I meant customer. Course Scientific has one customer and that
Speaker 1: customer is it's core Weave. As of right now, Corewave
Speaker 1: has approximately three hundred and sixty megawatts of compute power. Somehow,
Speaker 1: it intends to build another one point three gigawatts worth
Speaker 1: of compute using a partner that has never built an
Speaker 1: AI data center and does not be able to have
Speaker 1: any meaningful compute right now, this is all so good.
Speaker 1: I love this. Let's fucking go. This is the big IPO,
Speaker 1: this is the big aiaper. I am going insane every
Speaker 1: time I read about these goddamn companies. But let's summarize.
Speaker 1: Core Weave is burdened by interest payments that may belloon
Speaker 1: to as much as two billion dollars a year, and
Speaker 1: lost eight hundred and sixty three million dollars on two
Speaker 1: billion dollars of revenue in twenty twenty four. Sixty two
Speaker 1: percent of that revenue is from Microsoft, which has materially
Speaker 1: pulled back on data center buildouts and may have dropped
Speaker 1: some core Weave contracts, though core We've denies this is
Speaker 1: the case. Of course, Corby's expansion, which is critical to
Speaker 1: servicing future revenue and growth, requires it to invest tens
Speaker 1: of billion dollars the core Weave does not have. Corwy's
Speaker 1: data center expansion is dependent on what is primarily a
Speaker 1: bitcoin mining company called Core Scientific. It appears to have
Speaker 1: no AI capacity building, and they're meant to build over
Speaker 1: a gigawak capacity a time where they do not appear
Speaker 1: to have done so. And as a reminder, converting cryptocurrency
Speaker 1: mining data centers to HPC data centers is effectively starting
Speaker 1: from scratch. It's not good. It's not good at all.
Speaker 1: Corby should have been a positive signal for generative AI,
Speaker 1: or at least the way for generative AI to kind
Speaker 1: of go further than where it is today, or at
Speaker 1: least a way for AI boosters to shut me up.
Speaker 1: If GENERATIVEAI had this incredible demand, both from companies looking
Speaker 1: to integrate it and us looking to use it, Corweve
Speaker 1: would be making fat stacks of cash. I have a
Speaker 1: far more diverse customer base and if I'm honest, not
Speaker 1: have to take up more than five times its revenue
Speaker 1: and burdens and loans with loan shark level interest rates
Speaker 1: just to survive. But it is what it is, I guess.
Speaker 1: And another note Jim Kramer of CNBC. He said that
Speaker 1: Corweve was going to be one of the biggest IPOs
Speaker 1: of the year. That should tell you about everything