Don’t Mistake Market Resiliency for Invincibility
Are investors failing to fully consider the alleged Jensen Huang scandal, a likely rate hike and the fine print in CoreWeave’s report?
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The markets have been remarkably resilient so far this week in light of last Thursday’s deep selloff. The Nasdaq rose over 2.7% on Tuesday, and the chipmakers and the Magnificent Seven tech stars had very good days. The one exception: Nvidia (NVDA). It became embroiled over the weekend by a scandal involving its ever present and well-known CEO Jensen Huang. He has admitted to an affair with a Chinese national with possible ties to the Chinese intelligence services. Much is yet to be known, but this relationship could have been used to get around the sanctions put in place to keep China from getting top end AI chips.
Investors have taken this in stride, even as congressional hearings are going to follow and Nvidia’s board is conducting its own investigation. Nvidia is a key pillar of the AI ecosystem; there is no clear successor at Nvidia, and the company has played a primary role as the “central banker” to key AI plays within the circular financing that is endemic across the industry. I believe investors are too complacent around this evolving situation, and it bears watching closely in the weeks ahead.
The Nasdaq gave back a quarter of Monday’s gains on Tuesday. But that was a very mild bout of profit taking, especially given the October consumer price index print before the bell came in hotter than expected. The 10-Year Treasury shot back up to near the 5% threshold. A quarter-percentage-point rate hike is almost a certainty at the December Federal Open Market Committee meeting; it has, indeed, a 90% probability, according to Fed futures. Some governors are even talking about a half-point hike. Hardly a positive omen as we head into 2027.
In the (Neo)cloud
Investors appear to be excited about neocloud provider CoreWeave’s (CRWV) third-quarter results after the bell on Tuesday. The company’s top- and bottom-line numbers did easily beat expectations and management lifted forward guidance. Revenues rose nearly 170% on a year-over-year basis. The company lost significantly less money in the quarter as well. That’s all more than impressive, but digging under the hood yields some concerning factoids.
Interest expense for the quarter came in at $846 million, up 173% from the same period a year ago. Management expects this cost to rise to between $1.05 billion to $1.15 billion in Q4. Total debt rose by $11.8 billion sequentially from the end of Q2. Management stated they will fund more of their needs going forward via customer prepayments and contract-backed secured loans. This makes sense given the yields on some of the company’s previous issued debt yield in the mid-teens.
Management did boost the revenue run rate it expects to leave the fourth quarter, from $18.5 billion to $19.5 billion to $20 billion to $21 billion. The company ended the third quarter with nearly $47 billion of debt on its balance sheet and $87 billion of total liabilities. In short, I would not chase the rally in the stock today and CoreWeave’s Q3 results is not signaling an all clear for the neocloud industry.
The markets appear resilient, but I feel we are not anywhere close to being out of the woods on many fronts.
At the time of publication, Jensen had no position in any security mentioned.
