Editor’s note: Today is Porter’s fourth in a series about the enormous financial risks of the ongoing AI bubble. Please see the first essay here, the second essay here, and the third essay here.

It’s no surprise, but investors must remember that when the financial plumbing goes zero-sum, the pain will not be meted out equally. It’s the weakest who will suffer the most.

As Jesus says in Matthew 25:

Here’s one “hath not” that I’m certain will soon go to zero: CoreWeave (CRWV).

CoreWeave is a “neocloud.”

When a business model is described by a made-up word that has no actual meaning in the English language… buyer beware.

Neoclouds are companies that buy huge quantities of Nvidia fast graphics processing unit (“GPU”) chips, house them in data centers, and rent them out by the hour or the month, primarily to artificial intelligence (“AI”) companies. CoreWeave’s biggest customer (both directly and indirectly through Microsoft) is OpenAI. OpenAI isn’t funded from earnings. It’s funded by investors (who are taking losses) and Nvidia vendor financing.

CoreWeave has a business model only a sadistic mother would love. It is enormously capital-intensive because it must buy the Nvidia GPUs upfront – billions of dollars at a time. But the customer revenue comes in slowly over the following years. It is far from certain whether this future revenue will outpace the rapid depreciation of Nvidia’s GPUs.

And here’s the bigger problem: its collateral is also Nvidia GPUs. GPUs are physical hardware that Nvidia itself has said will be obsolete on a roughly two-year cycle. A GPU-backed loan is a claim on hardware that is losing value from the moment the loan is signed. And the price of these rapidly depreciating assets is likewise correlated to demand for CoreWeave’s services. It’s similar to how car-rental companies all go broke. When there’s a recession and no one is renting cars, the price of used cars likewise collapses.

The same will happen to CoreWeave’s data centers and its GPUs.