--:-- [Theme music fades out]
--:-- Host (Jessica Mendoza): In the past few months, spending on AI has skyrocketed. NVIDIA is making a $100 billion investment in OpenAI. Amazon share is jumping today after the company announced a $38 billion partnership with OpenAI. Anthropic is adding another $50 billion to its AI compute bill. Nearly every big tech company has dedicated hundreds of billions of dollars to AI projects, promising a transformational new era.
--:-- Host (Jessica Mendoza): Most of them are names almost everyone knows. Microsoft, Meta, OpenAI. But right at the center of this boom is a company that isn't a household name. It's called CoreWeave. CoreWeave is this company that to a lot of people kind of came out of nowhere, like late last year, earlier this year, but they're actually this kind of major player.
--:-- Host (Jessica Mendoza): Our colleague Dan Gallagher reports on tech. Even though they're a small company relative to these really big ones, they are a major player in this particular realm of artificial intelligence, data center computing. If you've ever used an AI product like ChatGPT, chances are you've interacted with CoreWeave. But you wouldn't know it.
--:-- Host (Jessica Mendoza): That's because the company provides the infrastructure for AI, leasing out the super advanced chips that are needed to power this technology. That means CoreWeave has positioned itself to be a big winner in the AI boom, with its revenue on track to more than double this year.
--:-- Host (Jessica Mendoza): But investors and industry insiders are watching this company closely. Because if the AI boom is actually a bubble, some expect CoreWeave to be the first domino to fall.
--:-- Host (Jessica Mendoza): Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, November 12th.
--:-- Host (Jessica Mendoza): Coming up on the show, the company you've probably never heard of at the center of the AI boom. This episode is presented by SAP.
--:-- Host (Jessica Mendoza): A bad storm hitting your warehouse. Incomplete customs forms. A short supply of those little plastic twist ties. These could all deal a crushing setback to your business, but they don't have to.
--:-- Host (Jessica Mendoza): The AI-powered capabilities of SAP will help you navigate uncertainty. You can pivot to new suppliers, automate paperwork, and source the twist ties you need so your business can stay unstoppable. Learn more at sap.com slash uncertainty.
--:-- Host (Jessica Mendoza): This episode is brought to you by PayPal. Okay, let's talk holiday shopping. Make the most of your money with PayPal. They give you the flexibility to pay in four. No fees, no interest.
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--:-- Host (Jessica Mendoza): CoreWeave began in 2017 with the purchase of a single chip. The founders were a group of Wall Street traders based out of New Jersey, and they had a hunch that GPU chips, made by a company called NVIDIA, were going to be a good investment.
--:-- Host (Jessica Mendoza): Could you just define what a GPU chip is?
--:-- Guest (Dan Gallagher): Sure. If you think about the computer that you're on has a main chip called a CPU, that's kind of the main brain. A GPU is an acronym for a graphics processing chip.
--:-- Guest (Dan Gallagher): And what it does is it helps the CPU process graphics more efficiently. That's the basic function. The way it does the computing, though, is it essentially accelerates the way the main chip works.
--:-- Guest (Dan Gallagher): And so when you put a bunch of GPU chips together, you know, in like a cluster with these other central brain chips, you could have essentially this powerful supercomputer.
--:-- Host (Jessica Mendoza): Initially, CoreWeave put those GPUs to work mining cryptocurrency. But it was a volatile market. And when crypto prices crashed in 2018 and 2019, the founders looked at other ways their chips could be used, including artificial intelligence.
--:-- Host (Jessica Mendoza): These guys were coming out of the financial industry. The CEO was a former commodities traders. They've all kind of come up out of that era. And so that kind of fed their approach to this.
--:-- Host (Jessica Mendoza): Obviously, it fed the opportunity they saw. They realized they had this asset that was valuable that they could pivot into like a profitable business model and went after that really quickly
--:-- Host (Jessica Mendoza): Roughly when did demand for these chips begin to increase?
--:-- Guest (Dan Gallagher): Well if you think about the launch of when ChatGPT became essentially public in terms of public launch, that was in late 22. Right.
--:-- Guest (Dan Gallagher): And really quickly, people flooded onto it, started using it. It got really popular really quickly. And that's what kind of triggered all these companies to start going really fast to build up their services.
--:-- Guest (Dan Gallagher): So with NVIDIA, it was in kind of early to mid-2023 that all of a sudden they started reporting a huge jump in sales of their chips, which just took on this explosive trajectory.
--:-- Guest (Dan Gallagher): And that was these companies like, you know, Microsoft, Google, Amazon buying them up, and also CoreWeave. So, yeah, everybody wanted these chips all of a sudden. And CoreWeave had a bunch of them.
--:-- Host (Jessica Mendoza): So this was sort of a case of right place, right time for this company?
--:-- Guest (Dan Gallagher): Oh, very much.
--:-- Host (Jessica Mendoza): Mike, thank you for joining us today.
--:-- Guest (Mike Entrader): Thank you for having me.
--:-- Host (Jessica Mendoza): Excited to be here.
--:-- Host (Jessica Mendoza): Last week, I got to sit down with CoreWeave's CEO, Michael Entrader, at the Wall Street Journal's Tech Live event in Napa Valley. And it's kind of legend at this point in tech circles, but you pivoted to AI infrastructure from crypto mining.
--:-- Guest (Mike Entrader): I don't think there was a point at which we said, hey, we need to pivot. I think what we did is said, hey, we want to make sure that we have the ability to be super flexible in an incredibly volatile environment.
--:-- Guest (Mike Entrader): And that turned out to be a good call. Today, CoreWeave leases its GPU chip power to some of the biggest tech companies investing in AI, like Microsoft and Meta.
--:-- Guest (Mike Entrader): And its shareholders include NVIDIA and OpenAI. You know, we want to be the best solution for delivering massive scale.
--:-- Guest (Mike Entrader): And scale is an important part of this, right? Like I always say, like anybody can run a GPU, but can you run a fleet of hundreds of thousands of them so that you can train the most sophisticated models on the planet so that you can serve inference for the most incredibly demanding consumers of compute?
--:-- Guest (Mike Entrader): And that's a very different proposition. I mean, the move is obviously paying off big. So far, so good.
--:-- Host (Jessica Mendoza): As AI spending has ballooned, CoreWeave continues to reap the rewards. This week, the company revealed that it's secured $55 billion in sales contracts.
--:-- Guest (Dan Gallagher): There's such demand for these chips that every company that's a player here, Microsoft, Google, Amazon, everybody, keeps saying that we have way more demand than we have supply from consumers, from corporate, wherever it's coming from.
--:-- Guest (Dan Gallagher): And so when you're a company like CoreWeave who has these chips in a data center and ready to provide the computing, you've got a lot of business right now because demand is way outstripping supply for it.
--:-- Host (Jessica Mendoza): All these deals that CoreWeave has secured has made it part of a trend developing in the AI industry. It's called circularity.
--:-- Host (Jessica Mendoza): It works like this. Company A pays money to company B as part of a transaction. And company B turns around and buys company A's product or service.
--:-- Host (Jessica Mendoza): May be using the money that company A gave them. This is also referred to as a dependency loop.
--:-- Host (Jessica Mendoza): CoreWeave is a company that's very closely entwined with other companies. Now, let me see if I can get this right.
--:-- Host (Jessica Mendoza): They are partly owned by NVIDIA, who also sells them chips. NVIDIA also sells chips to Microsoft, which is CoreWeave's biggest customer, and is also an investor in OpenAI, which is also a CoreWeave customer and a CoreWeave shareholder.
--:-- Host (Jessica Mendoza): Is this normal? Like, what is this? It feels it's so hard to wrap your mind around it.
--:-- Guest (Dan Gallagher): No, I would not call it normal. It's circular. You put your finger on it.
--:-- Guest (Dan Gallagher): And I think if you press these companies, they're going to say this is kind of how we work together to get this massive infrastructure project stood up because we're going to need all this computing infrastructure to do all the wondrous things AI can do.
--:-- Host (Jessica Mendoza): When I sat down with Mike and Trader, I asked him about the idea of circularity.
--:-- Guest (Mike Entrader): There is a component of which it is a team sport. Nobody can do it all. And so you're working together to try and deliver a size and scale of infrastructure that the world has never seen before.
--:-- Guest (Mike Entrader): And I don't think it's actually unusual when you have a boom that's taking place in a very compressed period of time to have this level of interaction between the companies.
--:-- Host (Jessica Mendoza): Dan says the system of interconnected companies is okay, as long as everyone is succeeding.
--:-- Host (Jessica Mendoza): But yeah you get in this world where you start to wonder if there was a problem with one of these companies somewhere does it like kind of teeter the whole system because everybody now got these super complicated intertwined deals going on
--:-- Host (Jessica Mendoza): And if there is a teetering, Dan says CoreWeave's high reward bet might become high risk.
--:-- Host (Jessica Mendoza): This episode is brought to you by Zoom. Work isn't just meetings. It's calls, chats, docs, emails, calendar invites, events, and more.
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--:-- Host (Jessica Mendoza): Optimism isn't sunshine and rainbows. It's fixing things, changing things, changing the way we fix things, rolled up sleeves, breaking through, growing power to meet growing needs, working to run the world on smarter energy every day.
--:-- Host (Jessica Mendoza): Taking power where the grid's never been, then getting up and doing it again.
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--:-- Host (Jessica Mendoza): In March, CoreWeave made its stock market debut. Can you talk about how that went?
--:-- Guest (Dan Gallagher): Well, I mean, it's been a pretty volatile stock since it went public.
--:-- Guest (Dan Gallagher): I think it actually went down its first day of trading, and then it kind of had this explosive growth up.
--:-- Guest (Dan Gallagher): And it really swings a lot on things like sentiment about AI, their own reported results.
--:-- Guest (Dan Gallagher): I think last week, the stock lost something recently like about 15% in a week.
--:-- Guest (Dan Gallagher): And that's not uncommon for them because it is pretty volatile.
--:-- Host (Jessica Mendoza): This week, CoreWeave reported its earnings and announced its revenue was on track to double this year.
--:-- Host (Jessica Mendoza): But the next day, the company's stock fell more than 16%.
--:-- Guest (Dan Gallagher): Dan says there are a number of reasons for this volatility.
--:-- Guest (Dan Gallagher): One of them is that investors are divided.
--:-- Guest (Dan Gallagher): Can all this spending on the AI infrastructure that CoreWeave provides continue at this breakneck pace?
--:-- Guest (Dan Gallagher): I mean, it depends on who you talk to.
--:-- Guest (Dan Gallagher): There are some that think, oh, AI is going to, this bubble, it's going to pop and not going to be around.
--:-- Guest (Dan Gallagher): And then on the other side are obviously the proponents, including all the companies involved, saying, no, it's going to reorder the economy and make the GDP double or all these other things.
--:-- Guest (Dan Gallagher): I think the more realistic risk is that open AI is going to be transformational, but it may take a lot longer than its proponents think.
--:-- Guest (Dan Gallagher): So you kind of have this push-pull with, you know, how fast is this technology really going to be adopted, really going to change things, and is it going to happen fast enough to essentially pay for all these financial commitments?
--:-- Host (Jessica Mendoza): Right. And so if that happens, if the AI bubble does burst or it takes too long for the technology to reap the benefits of this transformation, what would that mean for CoreWeave?
--:-- Guest (Dan Gallagher): It would be bad for them, honestly, because when you're Microsoft, you're Google, you're generating most of your revenue with businesses you've been in for a long time or very well established and are going to still be there if AI doesn't turn into what people think it will.
--:-- Guest (Dan Gallagher): CoreWeave is like really specifically hinged on AI. So if AI demand really stumbled somewhere, theoretically, they could be left.
--:-- Guest (Dan Gallagher): Because if you're Microsoft paying CoreWeave, like, a lot of money for, like, handling your computing, all of a sudden you just don't need that from them, you know, that's not good for CoreWeave.
--:-- Host (Jessica Mendoza): I asked Mike and Trader about the AI bubble.
--:-- Guest (Mike Entrader): I wanted to know if it's something CoreWeave is concerned about.
--:-- Guest (Mike Entrader): It's very hard for me to worry about a bubble when, you know, as one of the narratives, when you have buyers of infrastructure that are changing the economics of their company.
--:-- Guest (Mike Entrader): They're building the future. And one of the narratives that has come up, too, is this idea of, even in the long term, companies that come up as winners and losers in this space.
--:-- Guest (Mike Entrader): Are there ways that you can insulate CoreWeave from being the one left holding the bag, if anything does happen in that sense?
--:-- Guest (Mike Entrader): So, look, from a risk management perspective, you know, One of the narratives around CoreWeave as we went public was oh we so dependent upon Microsoft.
--:-- Guest (Mike Entrader): And now within the last quarter you seen us announce more deals with Meta you know a deal that at least billion
--:-- Guest (Mike Entrader): You've seen us announce more deals with NVIDIA. You've seen us, like, we're diversifying. We're doing all the things that a normal standard company should be doing to insulate themselves from the exposure and making the company more resilient, more scaled, and better able to withstand any type of slowdown that could potentially occur.
--:-- Guest (Mike Entrader): You know, it's not going to be a straight line. We know that. You're going to hit air pockets. We structure our deals out over term so that we're insulated from that.
--:-- Guest (Mike Entrader): We don't have to absorb that. there are better balance sheets in the world to hang that on than ours.
--:-- Guest (Mike Entrader): We're really thoughtful about that. We spend a lot of time kind of making sure that we're well positioned.
--:-- Host (Jessica Mendoza): And in Mike's view, one way to build fast is to leverage debt, which CoreWeave carries a lot of on its balance sheet.
--:-- Guest (Dan Gallagher): The way that we built our business and were able to scale our business to such enormous scale so quickly is that we used debt because debt is the correct way to do this.
--:-- Guest (Dan Gallagher): I realize I'm in Silicon Valley, and maybe that doesn't get as much traction as it does in New York. But debt is the right way to do this.
--:-- Guest (Dan Gallagher): Tech is usually a very cash-rich business. So for years and years, I've been on earnings calls where tech companies have bragged about the fact that they have no debt or almost no debt.
--:-- Guest (Dan Gallagher): So to see a company come into essentially the tech space and be open about the fact that they're building up with debt kind of contrasts with companies that can like write these massive checks out of their bank accounts.
--:-- Guest (Dan Gallagher): Well, obviously, you know, debt carries a risk because if you need to generate enough cash, free cash flow to service the debt, you know, pay the interest.
--:-- Guest (Dan Gallagher): And in the case of CoreWeave, they've got a lot of debt they've got to incur in the future because they have to keep buying chips, keep expanding their networks, keep expanding data centers to service the contracts they're getting.
--:-- Guest (Dan Gallagher): So there's not just paying off the debt they have. There's going to be, well, they have the growing cash flow to pay for the growing amount of debt that they're going to have.
--:-- Guest (Dan Gallagher): But so why do it this way? Is it the only way you can do it?
--:-- Guest (Dan Gallagher): If you're their size and you're coming into this market and competing with the companies they're competing with, that's how you have to do it.
--:-- Guest (Mike Entrader): During our conversation, Mike Entrader made it clear that he's confident that AI growth is going to continue.
--:-- Guest (Mike Entrader): But he also talked about a part of his personality, which is key to understanding why he does business this way, his appetite for risk.
--:-- Guest (Mike Entrader): I mean, ultimately, you know, for the first 20 years, 25 years of my career, I was a risk manager. That's what I did, right?
--:-- Guest (Mike Entrader): And my job is to sit over, as I continue to move up through the ranks, over desks and then ultimately over full trading floors and over full companies.
--:-- Guest (Mike Entrader): And so when I think about how to participate in this market, it's really through the lens of risk management as you're building at this unprecedented scale globally, globally as you are basically building a layer of infrastructure that, for all intents and purposes, truly did not exist five years ago and certainly will not exist in a way that we understand it in five years from now.
--:-- Guest (Mike Entrader): And Trader told me that the demand for this technology is just going to increase.
--:-- Guest (Mike Entrader): This is the line that we're hearing from all of these AI CEOs and CFOs and all the people who are very bullish on the growth of AI.
--:-- Guest (Mike Entrader): Everybody seems so certain of it. Is that fair? Like, are they seeing something that maybe the average person, me, isn't?
--:-- Guest (Dan Gallagher): Well, I mean, obviously, if you're in the AI business, that's the way you see the world. That's why you're in the business. You think it's going to be huge.
--:-- Guest (Dan Gallagher): They have a reason to see it that way. I don't know that anybody has a secret crystal ball to know the future.
--:-- Guest (Dan Gallagher): What they're seeing is the exponential demand that things like ChatGPT have seen. They see the potential for what AI can do for lots of different industries and think, okay, that's a definite thing. That's going to be huge.
--:-- Guest (Dan Gallagher): But nobody can tell the future. They might be right. They might be wrong.
--:-- Host (Jessica Mendoza): That's all for today, Wednesday, November 12th. The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Host (Jessica Mendoza): Additional reporting in this episode from Ben Cohen and Jonathan Weil.
--:-- Host (Jessica Mendoza): Thanks for listening. See you tomorrow.
