Trump Unveils Steep New Tariffs, TikTok Develops App for U.S. & CoreWeave’s $9B Acquisition

0:00:03 Avoiding your unfinished home projects because you’re not sure where to start?
0:00:07 Thumbtack knows homes, so you don’t have to.
0:00:10 Don’t know the difference between matte paint finish and satin?
0:00:13 Or what that clunking sound from your dryer is?
0:00:16 With Thumbtack, you don’t have to be a home pro.
0:00:17 You just have to hire one.
0:00:23 You can hire top-rated pros, see price estimates, and read reviews all on the app.
0:00:24 Download today.
0:00:26 Book club on Monday.
0:00:29 Gym on Tuesday.
0:00:32 Date night on Wednesday.
0:00:35 Out on the town on Thursday.
0:00:39 Quiet night in on Friday.
0:00:41 It’s good to have a routine.
0:00:43 And it’s good for your eyes, too.
0:00:49 Because with regular comprehensive eye exams at Specsavers, you’ll know just how healthy they are.
0:00:52 Visit specsavers.ca to book your next eye exam.
0:00:54 Eye exams provided by independent optometrists.
0:00:58 There’s a lot nobody tells you about running a small business.
0:01:05 like the pricing, the marketing, the budgeting, the accidents, the panicking, and the things.
0:01:09 And the things and the non-stop things.
0:01:12 But having the right insurance can help protect you from many things.
0:01:17 Customize your coverage to get the protection you need with BCAA Small Business Insurance.
0:01:23 Use promo code PROTECT to receive $50 off at bcaa.com slash smallbusiness.
0:01:26 Today’s number?
0:01:28 250,000.
0:01:33 That’s how many times the average person will yawn during their lifetime.
0:01:37 However, new research has shown that those numbers can increase significantly
0:01:42 when humans are subjected either to sleep deprivation or to the All In podcast.
0:01:55 Welcome to Prof G Markets.
0:01:56 I’m Ed Elson.
0:01:58 It is July 8th.
0:02:00 Let’s check in on yesterday’s market vitals.
0:02:04 The major indices all fell after Trump renewed trade tensions.
0:02:06 We’ll talk more about that in just a second.
0:02:09 The Dow and the Nasdaq dropped roughly 1%.
0:02:11 The S&P fell 0.8%.
0:02:14 The dollar gained and the yield on 10-year treasuries rose.
0:02:20 And meanwhile, Tesla shares fell nearly 7%, shedding $68 billion in value
0:02:24 after Elon Musk said he was forming a new political party.
0:02:27 Okay, what else is happening?
0:02:30 Trump announced a new slate of tariffs yesterday.
0:02:38 Those tariffs include a 25% tariff on South Korea, a 25% tariff on Japan, a 30% tariff on South
0:02:44 Africa, and several more tariffs on countries including Malaysia, Kazakhstan, Indonesia, and
0:02:45 Myanmar.
0:02:49 This comes as the 90-day tariff pause approaches its end.
0:02:55 As a reminder, the Liberation Day tariffs, which were enacted on April 2nd, were later paused
0:02:59 by Trump, and that pause is set to expire tomorrow, on Wednesday.
0:03:04 The administration has discussed extending that deadline, but as of this morning, unless new
0:03:09 trade deals are reached, the original Liberation Day tariffs will go back into effect.
0:03:14 Okay, so we have our first confirmed tariffs of the week.
0:03:21 25% to 40% tariffs on what looks like 14 countries right now, and these will likely be the first
0:03:22 of many.
0:03:28 Trump said over the weekend, quote, I am pleased to announce that the United States tariff letters
0:03:33 and or deals with various countries from around the world will be delivered starting Monday,
0:03:34 July 7th.
0:03:39 So as of Monday, we are 14 for 14 on tariffs.
0:03:44 There was some possibility, based on what he’d said, that we’d get some deals too.
0:03:48 But as of right now, no, we’re not getting any deals.
0:03:53 All we’re getting is tariffs, or tariff letters, as he put it.
0:03:58 And in this case, the tariffs will be applied to two of our largest trading partners.
0:04:04 We have Japan, which accounted for more than $200 billion worth of trade last year, our fifth
0:04:05 largest trading partner.
0:04:11 And also South Korea, which accounted for $180 billion worth of trade, our sixth largest
0:04:12 trading partner.
0:04:16 So these are two very important players in our economy.
0:04:19 In addition, they are also two of our closest allies.
0:04:23 I mean, you just look at our military relationship, for example.
0:04:30 America has 50,000 troops stationed in Japan, and we also have nearly 30,000 troops in South
0:04:30 Korea.
0:04:37 So aside from Germany, there is no other nation that hosts more American soldiers than Japan
0:04:38 and South Korea.
0:04:44 Meanwhile, these two countries are very important partners in space exploration, in semiconductors,
0:04:46 in AI, in clean energy.
0:04:47 The list goes on.
0:04:51 And now we have decided, actually, no, they’re not a partner.
0:04:53 They are, in fact, a threat.
0:04:58 As he said, a threat to our economy and a threat to our national security.
0:05:01 I’m not going to act surprised here.
0:05:03 I don’t think anyone’s really that surprised.
0:05:04 I think we’ve seen this all before.
0:05:08 This is essentially Liberation Day Part 2.
0:05:11 But, you know, we did see some market impact.
0:05:14 As I mentioned, the S&P fell around 1%, so did the NASDAQ.
0:05:20 And there are questions now as to what this will do to America and to our economy.
0:05:23 So for more on that, our producer, Claire, spoke with Barry Appleton.
0:05:28 He is the co-director of the Center for International Law at New York Law School.
0:05:33 I think the markets have misunderstood what this week’s about and what’s going on.
0:05:38 And I think it’s better to get a sense of the context because the markets keep moving.
0:05:40 They keep going ahead and keep pulling back, retrenching.
0:05:43 And it’s because they don’t understand the game.
0:05:48 What you need to understand is that, you know, President Trump is a real estate guy.
0:05:51 And he also runs golf clubs and Mar-a-Lago.
0:05:56 So he understands about people wanting to pay for access.
0:06:00 So what he’s decided to do, disrupt the games.
0:06:04 We had all these trade agreements, all these things that said everyone would get market access for free.
0:06:11 And in exchange, the U.S. would get access for services or access for certain market, you know, and other things.
0:06:12 But we didn’t ask for money.
0:06:15 Now he says, no, you want to come to our game?
0:06:16 You want to come to my club?
0:06:19 You want to come to Mar-a-Lago and eat the chocolate cake?
0:06:20 You got to pay.
0:06:22 The payment’s going to be the tariff.
0:06:26 And so the question was, everybody had to put in an application.
0:06:28 Those applications were due today.
0:06:35 And so what he did is he had the first set of letters to people that he wasn’t going to give preferential pricing.
0:06:38 So he would look at his application and decide, am I going to give you the friends and family rate?
0:06:41 Am I going to charge you like the supermarket rate?
0:06:44 Am I going to give you any discount or no discount at all, right?
0:06:49 If you give him an invite to go meet at the palace with the king, then he makes it really cheap.
0:06:54 If you’re going to say bad things like South Africa, he just made it 30%, right?
0:06:56 So that’s what’s going on.
0:06:58 So the applications, they’re in.
0:07:00 He then has a series of letters.
0:07:06 So he’s decided that he’s got at least seven countries out of 70 that say they wanted to deal with things.
0:07:08 At least seven, he wanted to teach them a lesson.
0:07:12 They’re the ones that got the truth social tweet today, okay?
0:07:17 So out of the goes to them, he says, I’m going to charge you what the market will pay.
0:07:20 And you’re going to pay for market access.
0:07:23 In fact, you’re going to pay search pricing.
0:07:26 It’s like going to a Taylor Swift concert.
0:07:29 You are paying extra to be able to get those seats.
0:07:31 So that’s going on.
0:07:34 And that is supposed to come out on the 9th.
0:07:39 So on Wednesday, he’s supposed to give all these countries their letters.
0:07:42 So you’re going to see what I call a policy striptease.
0:07:47 He’s going to take one veil off at a time, letter after letter, coming out on through social.
0:07:50 And each country is going to find out what’s going to happen.
0:07:53 But markets don’t like uncertainty.
0:07:57 And they actually don’t like policy coming in dribs and drabs.
0:08:00 So the market doesn’t know how to react.
0:08:12 But if you understand that’s part of a show, it’s part of an act, and it’s just the first part of it, then you might react in a different way than if you think it’s the end of the game.
0:08:15 So the markets didn’t like this on the weekend.
0:08:17 They started to hear what was going on.
0:08:19 Then they saw more today.
0:08:20 They started selling off again.
0:08:24 But there’s no difference in the market today than there was yesterday or on Friday.
0:08:25 Okay.
0:08:29 What you want to know about is what’s going to happen at the end of the week and the end of this month.
0:08:33 So the first thing is, do you believe that Trump wants tariff revenue?
0:08:39 It’s pretty clear now after the one big beautiful bill and listening to the Treasury Secretary, he wants some tariffs.
0:08:41 So no one’s getting in for free.
0:08:45 Anybody that thinks they’re getting into Mar-a-Lago for free is going to be very mistaken.
0:08:47 Everyone pays something now.
0:08:54 That was Professor Barry Appleton, co-director of the Center for International Law at New York Law School.
0:08:56 Very chaotic once again.
0:09:01 I mean, this whole tariff policy is being played out online on Truth Social.
0:09:06 As he said, these tariff letters aren’t really being sent to these countries.
0:09:09 These tariff letters are being posted online on Truth Social.
0:09:11 They’re essentially screenshots.
0:09:14 And we are watching the show play out in real time.
0:09:17 And so I think he’s certainly correct on that point.
0:09:22 One thing is for certain, though, and that is that this story is not over yet.
0:09:23 July 9th has yet to come.
0:09:26 We’ve still got lots of tariffs in the pipeline.
0:09:29 Potentially lots of deals in the pipeline.
0:09:30 I don’t know.
0:09:30 We’ll see.
0:09:32 We haven’t seen that many so far.
0:09:35 But we’ll be keeping very close tabs on this throughout the week.
0:09:36 So stay tuned.
0:09:47 TikTok is reportedly building a new app for American users ahead of a potential sale to American investors.
0:09:54 The company plans to launch the new app on September 5th, although the existing app will work until March 2026.
0:10:01 And this new app is part of a broader effort to make the platform more appealing and ultimately more transferable to a U.S. buyer.
0:10:08 As a reminder, TikTok was going to be banned in America unless it was sold by its Chinese owner, ByteDance.
0:10:14 That was until Trump decided to delay that ban and he allowed TikTok to continue operating.
0:10:20 However, he is now reportedly working on a deal to get TikTok into the hands of a U.S. investor.
0:10:30 And the fact that TikTok is now building this U.S. version of the app, well, that is probably more evidence that a TikTok sale may indeed be on the horizon.
0:10:34 Meanwhile, the timing of all of this is quite convenient for Trump.
0:10:40 As we just discussed, he’s working through these trade negotiations with many countries, including China.
0:10:49 And according to Alice Han, China economist and director at Green Mantle, this deal could be another bargaining chip in those negotiations.
0:10:53 The biggest question mark, which is Beijing’s reaction function.
0:11:08 On that topic alone, I sense that there could be more concessions from China, meaning that they could decide to allow this subsidiary of a U.S. TikTok to be spun out of ByteDance itself.
0:11:15 And that that unit of the business, the U.S. operations, that is, could be sold to U.S. parties.
0:11:25 I sense that the Chinese at a macro fundamental level want to try to reduce tensions on trade with Trump because they are worried by their erratic nature.
0:11:31 Again, we just saw in the last day or so that he’s talking about another 10 percent Brinks tax.
0:11:35 And so I think he’s applied pressure on transplants for a couple of these Southeast Asia countries.
0:11:39 So I could see the Chinese potentially offering this as a concession very quietly.
0:11:44 That was Alice Han, China economist and director at Green Mantle.
0:11:52 So bargaining chip or not, there is a growing sense that TikTok will at some point be sold to an American investor.
0:11:59 And the question then becomes, one, when, two, how, and three, to whom?
0:12:04 Those are all the questions that we’re all asking and we can’t really answer right now.
0:12:05 There have been some rumors.
0:12:09 Oracle has been floated as a buyer, for example.
0:12:10 So has Amazon.
0:12:13 And there have also been some more outlandish rumors.
0:12:16 Kevin O’Leary, for example, Mr. Wonderful.
0:12:17 He’s been floated as a buyer.
0:12:20 And Alexis Ohanian, the co-founder of Reddit.
0:12:23 Now, I don’t doubt that those guys have made bids.
0:12:27 Kevin O’Leary, for example, has spoken about his bid on TV.
0:12:32 But I think the question you have to ask is, do you have the money?
0:12:37 And the answer for those guys and for many people is probably no.
0:12:39 This deal is going to be a lot.
0:12:42 This deal is expected to be north of $50 billion.
0:12:48 And there are very few entities out there, let alone people, that can actually afford that.
0:12:52 So in terms of buyers, no, I don’t think Kevin O’Leary is going to own TikTok.
0:12:57 But there is definitely a world in which a company like Oracle could own it.
0:13:03 And that would be a huge shakeup to the social media economy, which is, of course, as of today,
0:13:06 totally dominated by Meta.
0:13:08 So let’s check in with Scott on this.
0:13:12 As you probably know, he has been calling for TikTok to be banned for several years now.
0:13:15 I’m sure he has some opinions on this.
0:13:18 Plus, it’s been a while since we’ve heard from him.
0:13:20 He’s been off on vacation with his family.
0:13:25 But I am happy to report that he is, as of today, back to work.
0:13:26 So let’s give Scott a call.
0:13:30 Hey, Scott.
0:13:31 How are you, Ed?
0:13:32 I’m doing well.
0:13:32 How are you?
0:13:33 It’s been a while.
0:13:34 Yeah, it has been a while.
0:13:38 I had a nice weekend and I’m wrapping up our trip.
0:13:39 Oh, you’re still in Ibiza?
0:13:40 Yeah, still here.
0:13:41 Okay.
0:13:42 Still here.
0:13:44 Head to Los Angeles on Wednesday.
0:13:45 But yeah, still here.
0:13:46 Good stuff.
0:13:47 What’s the plan for LA?
0:13:51 Well, I don’t know if you’ve heard this, Ed, but I’m working on an original scripted program
0:13:53 from a little company called Netflix.
0:13:54 Oh, there we go.
0:13:59 A little company called Netflix that I bought at $12 a share and then sold at $10 and now
0:14:00 it’s trading at $1,400.
0:14:04 So I want to find a time machine so I can go in that time machine, go back, kill me, and
0:14:06 then come back and kill myself.
0:14:07 When is that coming out?
0:14:11 It’s coming out in fall of next year, fall 2026.
0:14:13 Oh, that’s pretty soon.
0:14:14 That is quite exciting.
0:14:17 Okay, well, we’d like to get your take on this TikTok news.
0:14:19 TikTok is building this new app.
0:14:25 Probably the best evidence we’ve gotten so far that they will sell to an American investor.
0:14:26 What’s your take, Scott?
0:14:31 My gut is that it’s the mother of all jazz hands.
0:14:34 That it’s a giant head to say that it’s essentially bullshit.
0:14:39 But if they’re going to try and rebrand it, say it’s a different app, come up with a bunch
0:14:43 of reasons for why it’s unique, maybe allow some additional investors, create a new entity.
0:14:49 But as long as the algorithm is controlled out of Beijing or there’s back doors into the
0:14:54 algorithm and they can continue to raise a generation of military, nonprofit, and business leaders
0:15:01 and teach them to basically hate each other and hate America, which is, I think, too valuable
0:15:05 a propaganda machine for them to give up.
0:15:10 I don’t think they’re going to want to unplug a neural jack from the wet matter of all of America’s
0:15:11 youth.
0:15:17 So, and I think the president has proven himself to, that he is not a serious person with regards
0:15:19 to threats to ban things.
0:15:23 So, I think it’s going to be performative and branding.
0:15:28 But at the end of the day, I think the CCP will continue to control the algorithm.
0:15:29 So, for me, it all comes down to ownership.
0:15:30 So, we’ll see.
0:15:32 So, what would your prediction be?
0:15:33 How do you think this plays out?
0:15:40 Are you saying that we’ll see a sale of the app, but the CCP will still have control of
0:15:44 the algorithm, but the sale will happen, or we won’t see a sale at all?
0:15:46 How do you see this playing out?
0:15:52 I don’t know if they’ll come up with some jazz hands around a new app, new branding, some
0:15:53 additional security measures.
0:16:00 But I just get the sense that the CCP would rather have a call President Trump’s bluff and
0:16:06 say, okay, ban the app and perhaps lose 20% of revenue, which they don’t really care, then
0:16:13 give up what has become the most, the propaganda dream of MI6 and Mossad and the CIA.
0:16:16 I just don’t think, I don’t think the CCP is going to give it up.
0:16:20 So, that’s my prediction, that at the end of the day, this thing is either banned because
0:16:25 they refuse to give up control of the algorithm, or effectively, it’s performative.
0:16:32 I think that basically that Trump’s hand, he’s overplayed his hand, it’s getting weaker and
0:16:32 weaker.
0:16:37 I mean, just thinking about the tariffs, Ed, I believe, and there’s evidence that there’s
0:16:43 been more dollar volume of trade deals done outside of the U.S. between third parties that
0:16:45 have been inspired by Trump’s threats.
0:16:51 So, the EU in Mercosur, the EU in India, Southeastern nations, African nations are talking and doing
0:16:58 regional trade deals. I believe the dollar volume of deals inspired by Trump’s hostile rhetoric and
0:17:04 threats of a trade war is much greater than the actual deals that have been consummated so far
0:17:10 between the U.S. and nations. I mean, I think his hand is just getting weaker and weaker.
0:17:18 Yeah, I think that makes sense. Before you go, Scott, can we just get a vibe check on Ibiza and
0:17:21 Europe and the Mediterranean? How are things over there?
0:17:29 Well, Ed, I mean, income inequality rages on. I’m with, I’m on an island. There’s sort of this-
0:17:30 It’s fine to say it’s nice.
0:17:38 Well, yeah, okay. It’s really nice, but the douche circuit lives on, whether you’re in St.
0:17:45 Barts or Ibiza or Mykonos. You know, this isn’t the real world. This is the 1% and the children are the
0:17:51 1%. So I don’t know if this is a decent indication. What I will say is that inflation, and nobody talks
0:17:55 about this, inflation at the high end has been greater than any other segment.
0:17:56 Rich people inflation.
0:18:01 Yeah, because these people are pretty much price insensitive, and it’s not easy to spin up one of
0:18:09 these global hotspots. So, but this is definitely, it reminds me of the last 20 years, whenever I go
0:18:14 skiing, I ask myself, how does a middle-class family afford this? And the answer is they can’t.
0:18:23 But there appears to be no slowdown amongst kind of these very, I don’t know, high prestige,
0:18:29 elite places. What Ibiza has done, and I’m glad you asked, and I’m sure you’re regretting asking,
0:18:33 what Ibiza has done that’s really interesting is a lesson in branding. And that is, they have done a
0:18:40 great job of creating a kind of a global hotspot or a party island that has the best DJs in residence.
0:18:44 So they’ve kind of become known for having the best DJs in the world. And it’s a really
0:18:49 interesting brand positioning, which results in great margin. But it’s just a super interesting
0:18:53 strategy that they’ve figured out that, all right, we’re going to be the party place that has the
0:18:54 best DJs in residence.
0:18:55 And how does it compare to Mykonos?
0:19:00 Well, I’m older, so I enjoy Mykonos more because I think it has more character in the individual
0:19:05 islands with no cars and more interesting. But if you’re your age and you’re being overpaid by a
0:19:10 boss who has affection for you for no real reason or no real tangible reason, you’re going to want to
0:19:15 come, like you and the team would come to Ibiza. Like Greece is, Greece is a little bit more
0:19:19 interesting, a little bit more classy, which is, you know, you’re none of those things. So I would say
0:19:19 Ibiza.
0:19:25 Okay. Noted. Thank you, Scott. Enjoy your night.
0:19:25 Thanks, Ed.
0:19:32 After the break, a $9 billion acquisition from CoreWeave. Stay with us.
0:19:43 Support for the show comes from Grooms. You’ve heard me talk about these guys before,
0:19:47 but let me refresh your memory. Grooms are a convenient, comprehensive formula packed into
0:19:52 eight delicious gummies a day. This isn’t a multivitamin, a green gummy, or a prebiotic.
0:19:58 It’s all of those things and then some at a fraction of the price. And bonus, it tastes great.
0:20:02 And just in time for summer, Grooms has a limited edition raspberry lemonade flavor.
0:20:06 So you can upgrade your wellness routine with a fun and refreshing snack pack that couldn’t be more
0:20:11 convenient. Perfect to toss into your beach bag, your carry-on, or wherever your summer travels take
0:20:15 you. Our Grooms daily snack pack is vegan, free of nuts, gluten, and dairy, and made with no
0:20:20 synthetic sweeteners, or dyes. Grooms says their daily snack pack of eight gummies contains more
0:20:25 than 20 vitamins and minerals and more than 60 whole food ingredients. Grab your limited edition
0:20:30 raspberry lemonade Grooms. Get up to 52% off when you go to Grooms.co and use the promo code PROPG.
0:20:45 The Supreme Court has just held that federal judges can’t block even unconstitutional executive orders
0:20:52 throughout the country. So what now? I’m Preet Bharara, and this week Supreme Court experts Trevor
0:20:58 Morrison, Melissa Murray, and Jack Goldsmith join me on my podcast Stay Tuned with Preet to discuss the
0:21:04 biggest implications of the court’s term. The episode is out now. Search and follow Stay Tuned
0:21:06 with Preet wherever you get your podcasts.
0:21:13 What’s up, y’all? It’s Kenny Beecham. The 2024-2025 NBA season is over, but all that means for us is that
0:21:20 the 2025-2026 season is already beginning. On Small Ball, we’ll be talking about breaking news,
0:21:25 major trades, and all the exciting developments the offseason has in store. Which teams are tearing it
0:21:30 down? Who is retooling to make a championship push? And what teams are leaving me dumbfounded
0:21:34 about their lack of direction? Don’t miss Small Ball, we can’t even beat your new episodes drop every
0:21:38 Friday. Available on YouTube and wherever you get your podcasts.
0:21:48 We’re back with ProfG Markets. AI company CoreWeave is acquiring Bitcoin mining company Core Scientific
0:21:56 for $9 billion. The all-stock deal will value Core Scientific at roughly $20 per share. That represents
0:22:02 a 66% premium to its closing price before the transaction. The deal is expected to close
0:22:09 in the fourth quarter of this year. Just a reminder on CoreWeave. What is CoreWeave? This is the company
0:22:15 that went public in March of this year. It was the biggest American IPO of the year. They raised
0:22:22 $1.5 billion. And as we’ve discussed, since going public, the stock is up nearly 300%. So it is
0:22:30 absolutely ripping. Now, what does CoreWeave actually do? Well, put simply, they sell compute.
0:22:36 CoreWeave operates 33 data centers around the world, and they have roughly 250,000 NVIDIA chips.
0:22:43 And they sell access to those chips to tech companies, companies like OpenAI and Meta and Google
0:22:50 and Microsoft. People call it an AI company. It probably makes more sense to call it a data center
0:22:55 company. They’re not building AI, but they are selling the compute that is needed to build AI.
0:23:02 So why would CoreWeave, this data center company or this AI company, why would they want to buy
0:23:09 CoreScientific, which is a Bitcoin mining company? Well, the answer actually makes more sense than you
0:23:15 might think. Because it turns out that Bitcoin mining and AI actually have quite a lot in common.
0:23:22 And that is, they both require tons of compute. As we’ve discussed, the Bitcoin network consumes more
0:23:29 than 200 terawatt hours per year. And that is more than the annual electricity consumption of
0:23:35 Argentina. So if you want to mine Bitcoin, well, basically you need chips, and ideally lots of
0:23:41 them. And that is exactly what CoreScientific offers. They have nine data centers across the US,
0:23:47 and those data centers were originally supposed to be used for Bitcoin. But suddenly the AI revolution
0:23:52 happened, and then the company realized, well, those same data centers are actually just as useful for
0:23:58 AI as they are for Bitcoin. So the company pivoted, and they started renting out their compute to AI
0:24:04 companies. And now CoreScientific will become part of this AI company that is CoreWeave.
0:24:09 Interesting side note, by the way, CoreWeave has a very similar history to CoreScientific. It also
0:24:16 started out as a Bitcoin company. But then as AI took over, they suddenly realized, oh, these data centers,
0:24:22 they can actually be used for AI. So they pivoted to AI as well. So there’s a lot of overlap between these
0:24:27 two companies. They also both have the word Core in their names. But to be clear, that is just a
0:24:33 coincidence, these are two totally separate, totally distinct companies. Okay, back to the deal.
0:24:42 $9 billion, all stock deal. As I mentioned, CoreWeave is paying a 66% premium for this company. And that is
0:24:50 pretty enormous. The average premium for a public company acquisition is between 20 and 40%. This
0:24:57 acquisition is pushing 70%. So in other words, CoreWeave appears to be overpaying. And that would
0:25:03 explain what happened to the stock. CoreWeave stock fell nearly 5% on the news, somewhat significant, but
0:25:10 also somewhat expected. What was less expected, though, was what happened to CoreScientific stock.
0:25:16 You would think that if a company was being bought at this significant premium, then the stock would go up.
0:25:24 That is at least usually what happens in M&A. But no, CoreScientific stock went down by about 15%.
0:25:31 In other words, investors seem to think this premium wasn’t enough. They wanted more. And the net net of this
0:25:39 transaction is that both companies lost value. And that is quite strange. So to better understand what has
0:25:46 really happening here, we spoke with Gil Luria. He is the head of technology research at DA Davidson.
0:25:52 Since the deal is only going to close in the fourth quarter, and it’s a stock only deal, what this
0:26:01 reaction tells us is that the holders of CoreScientific believe that CoreWeave’s stock will be lower by the
0:26:08 time the acquisition closes, which is why the value of shares they get at that time will be lower than
0:26:16 the implied stock price at the closing today. So that’s the reaction to CoreScientific. On the CoreWeave
0:26:25 side, this is a little bit more financial engineering from their side. This is a company that really is
0:26:30 mostly built around financial engineering. And this is just a little bit more of that.
0:26:36 CoreWeave is not using cash, right? They’re just issuing new shares, diluting their own shareholders.
0:26:42 Is that why CoreWeave shareholders are potentially upset about this acquisition?
0:26:51 Yes, that’s exactly right. So they’re using almost 10% of their shares to buy a business that is also
0:26:57 losing money and also has negative cash flow. So that’s a dilutive acquisition, which is why
0:27:04 CoreWeave shares down today as well. Okay. And then basically CoreScientific shareholders are
0:27:09 thinking CoreWeave is currently overvalued. That’s right. Since the transaction closed in the fourth
0:27:17 quarter, a lot’s going to happen between now and then. CoreWeave, the share lockup from the IPO will
0:27:23 happen. And so a lot more shares will become available, which will likely reduce the share price for CoreWeave.
0:27:30 So by the time CoreScientific shareholders get CoreWeave share, the share price will be lower.
0:27:32 And that’s what’s reflected today.
0:27:39 Before I let you go, I’d love to just get your sense of CoreWeave as a business. Our co-host Ed,
0:27:46 he sort of thinks that CoreWeave exists because NVIDIA wants it to exist and that they have this
0:27:51 over-reliance on NVIDIA’s GPUs. What do you think of that?
0:27:59 Yeah. NVIDIA created CoreWeave and other neo-clouds such as CoreWeave to put pressure on its largest
0:28:07 customers, Microsoft, Google, Meta, and Amazon. And it’s continued to prop CoreWeave up all the way
0:28:18 through the IPO in order to do that. CoreWeave is really a deal between NVIDIA, Microsoft, and
0:28:24 debt holders to build data centers. So this is a much more of an unusual situation where the whole entity
0:28:31 was created because NVIDIA didn’t want to just have four or five customers. It wanted to diversify its
0:28:37 customer base. So instead of selling the chips directly to Microsoft, it sold them to CoreWeave.
0:28:44 CoreWeave doesn’t have any customers. Microsoft does. So then Microsoft turns around and rents that
0:28:50 capacity from CoreWeave. If all that sounded convoluted, it’s because it is. This is financial
0:28:59 engineering to serve the purposes of NVIDIA. Really, CoreWeave, in its essence, is if you would take
0:29:07 at 12.5% margin loan to buy treasuries yielding 5%, it’s not a good idea. And eventually, the market
0:29:14 will figure that out. Well, I have to say, I loved that response from Gil Luria. He’s the head of
0:29:21 technology research at DA Davidson. Totally agree with his analysis on CoreWeave as a company. But he also
0:29:28 mentioned something there that is really important about this acquisition and how the stock reacted to
0:29:34 this acquisition. Because this is an example, and it’s a great example, of the market whispering a
0:29:42 secret to us that many perhaps didn’t want us to hear. And in this case, the secret is being revealed
0:29:49 by the shareholders of Core Scientific, who, by selling their stock after they had received this
0:29:55 pile of CoreWeave shares that, as I said, were worth 66% more than the current value of their company.
0:30:02 CoreWeave. By selling, they essentially told us that they do not believe in the current valuation
0:30:09 of CoreWeave. They believe that by the time this deal closes, in Q4 of this year, CoreWeave will be
0:30:16 worth significantly less than it is now. And they will be left with a pile of shares that they basically
0:30:23 just don’t want. So put another way, this is about as good of a sign as you could get that CoreWeave is
0:30:29 indeed overvalued. And this is something that I have pointed out before, and that is partly why I like
0:30:37 this story. Because yes, CoreWeave was the hottest IPO of the year. Yes, it is part of the AI story.
0:30:46 Yes, it’s quadrupled since the IPO. It looks great. But when you look beneath the hood, what you discover
0:30:54 is a business that is fundamentally quite weak? It’s way over-dependent on NVIDIA. It’s got way too much
0:31:02 customer concentration in Microsoft. And it’s also got $8 billion worth of debt. As Gil said, it’s
0:31:06 essentially a practice in financial engineering. And as I’ve said before, the only reason this company
0:31:14 exists is because NVIDIA wants it to exist. But if that changes for whatever reason, well, then you don’t
0:31:19 really have much of a company left. So that’s the concern that I have flagged. But what we are learning
0:31:26 with this transaction, and specifically with what happened to Core Scientific stock, is that other
0:31:33 investors, the shareholders in that company, they are concerned about this too. And that is why you saw
0:31:39 this enormous drop in this company you’ve probably never heard of. Because the investors in Core Scientific
0:31:47 believe that despite that 66% premium, which seems great, despite that, the current valuation of Core Weave is
0:31:55 too high. The company is over-sensationalized, it is over-hyped, and they believe that come Q4, when the deal
0:32:04 closes, the hype will have run out. It sounds like Gil Luria agrees with that thesis. And in this case, I agree with
0:32:10 that thesis too. Okay, that’s it for today. Thanks for listening to Prof G Markets from the Vox Media
0:32:13 Podcast Network. I’m Ed Elson. I’ll see you tomorrow.
0:32:41 Prof G Markets from the Vox Media