Neocloud companies stockpile processing power, Pay your taxes with Crypto and President Musk

Greetings folks and a warm welcome to the 17th Edition of Friday Finance Weekly. I hope everyone has recovered from the U.S. Election hangover. This was the first time I went to an election viewing party, and it was a blast. I am curious to know if Trump will pardon himself; I assume he would, or maybe Biden will do that as part of the peaceful transition of power. Exciting times ahead.

So-called “neocloud” companies are businesses that provide cloud computing services to tech groups for uses like mining cryptocurrency and building AI products. Neocloud groups like CoreWeave, Crusoe, and Lambda Labs have each acquired tens of thousands of Nvidia’s high-performance computer chips (i.e., GPUs). Access to these valuable assets has given confidence to Wall Street lenders to provide billions of dollars in debt, which has in turn fueled the acquisition of thousands more GPUs. Nvidia itself is an investor in neocloud companies, which are among its largest customers.

Let’s look at the history of CoreWeave, for example:

• The company began amassing chips in 2017 and now claims to be the largest private operator of Nvidia GPUs in North America, with more than 45,000 chips.

• Backed by venture capital and Nvidia itself, the company has grown its valuation from $2B to $19B over the past 18 months.

• Offering GPUs as collateral, the company has raised over $10B in asset-based loans from alternative sources like Blackstone, Carlyle, and Magnetar Capital in the last 12 months.

• Using these debt proceeds, the company has opened 28 data centers across the US and Asia – a ninefold increase in its footprint since the start of last year.

Given these dynamics, some are beginning to raise red flags around the circularity of these financings and the inherent weaknesses of taking GPUs as collateral. Looking at some of the prominent risks, these concerns appear to be well-founded.

• While the company’s financial statements are not publicly available, the Financial Times reported that CoreWeave revenues have increased from just $25M in 2023 to an estimated $2B today. However, in recent months, the price of GPU computing has crashed from around $8/hour to about $2/hour.

• Nvidia denies giving preferential access to its chips to any customer, including those it invests in. This stance could present issues for neoclouds like CoreWeave as future growth is reliant on access to Nvidia’s newer Blackwell chips.

• Some tech companies are developing their own high-performance GPUs to challenge Nvidia. The projected supply increase could lead to a glut in the market, devaluing the value of CoreWeave’s collateral base and dampening the company’s ability to refinance existing lease contracts at maturity.

How do they calculate values when new models come out? The underwriting is interesting to say the least; these are depreciating assets with new models coming out every year. Perhaps the used car market will give insights into how these GPUs will be priced. (Source: FT)

Starting in 2025, residents of Detroit will have the option to pay their taxes, along with other city fees like utility bills, using cryptocurrency. According to city treasurer Nikhil Patel, the modernization of Detroit’s payment channels is intended to make the city a more “technology-friendly environment” and will make it easier for residents to make electronic payments – including those who may be unbanked. With this announcement, Detroit will become the largest U.S. city to accept crypto as a valid form of payment, joining the municipalities of Williston, North Dakota, and Miami Lakes, Florida.

The price of bitcoin climbed to a new high of USD $76,999 (CAD $107,182) earlier this week, following Donald Trump’s election victory. Elon Musk’s favorite crypto, dogecoin, followed a similar trajectory with an 18% gain, while crypto-related shares outran the rest of the stock market. Prior to the election, Trump had promised the removal of SEC chairman Gary Gensler, who has been leading the government’s crackdown on the crypto industry. The Trump administration is expected to pursue a “light touch regulation” approach towards enforcing the industry.

As of this writing, the global crypto market is valued at $2.51T – a 0.48% increase over the last trading day. I am always surprised at how innovative governments can be when they want to collect money from you? When they want things to be inefficient (i.e., voting), they are very good at doing so as well. I guess governments are good at being both efficient and inefficient.

(Source: CBS, Bloomberg, CoinMarketCap)

Leading up to this year’s election, Elon Musk spent more than $130M through his political action committee (PAC) on Trump and down-ballot Republicans in competitive House races. These contributions made Musk one of the largest donors this election cycle, but the power of his endorsement was also showcased through his wielding of the X platform.

• Using his control over X, Musk flooded the social media site with disinformation about popular Republican talking points, including election fraud and immigration.

• The PAC also funded Democrat impersonation campaigns on Facebook and through texts designed to target voters with messages that might persuade them to vote against Harris.

During the campaign, Musk also pitched himself for the role of cutting government bureaucracy and waste, claiming his operational savvy could reduce the federal budget by an estimated $2T. While Musk has much to gain financially from the incoming administration, his biggest win could be through unfettered access to various regulatory bodies. A broad remit would give Musk leverage to reshape federal agencies that are tasked with regulating and investigating companies, including his.

• SpaceX already has government contracts worth more than $15B collectively but has been highly vocal about his displeasure with the FAA’s approval rate for new rocket launches. Trump has also expressed his desire to see a Mars landing during his term as President, leading to speculation that more government funding could be on the horizon for SpaceX.

• Trump has also changed his tune on electric vehicles, going from railing against “crooked Joe’s insane EV mandate” to praising the industry at times. It’s unclear how this new alliance will impact Trump’s stance regarding trade restrictions with China. While tariffs against Chinese goods will impact Tesla’s factory in Shanghai, the new levies may obliterate the company’s cheaper Chinese EV rivals. Separately, Musk has also stated that he will use whatever power he is given to lobby for a federal approval of fully autonomous vehicles. Since Monday, Tesla’s share price has rocketed more than 33%, resulting in a $1.02T market cap as of today.

• Other Musk-owned businesses like X and Neuralink have been heavily scrutinized by the FTC and the FDA, respectively.
  

On Wednesday alone, Musk added roughly $26.5B to his net worth (a 10.1% same-day gain), extending his lead as the world’s richest man with a total net worth of $290.3B. So far, his $130M initial investment into Trump’s campaign has resulted in a stellar 20,385% ROI. Let’s face it, Musk was trying to make back all the money he lost in Twitter/X and looks like his bet paid off. (Source: Morning Brew, Bloomberg)

I was hoping to have a longer read for the long weekend but I am a little pressed for time today. Have a fantastic long weekend and please don’t hesitate to forward this newsletter to friends and family.

Many thanks,

Sam