The initial public offering (IPO) market has been ice-cold since 2021. In 2020 and 2021, we saw a deluge of companies entering the public markets, especially via a boom in special purpose acquisition companies (SPACs). Many of these ended up being poorly run businesses, and some were even frauds. Ever since then, there has been a mere trickle of new stock listings, as start-ups decided to remain private.
Could artificial intelligence (AI) be waking the IPO market up? Last week, AI cloud start-up CoreWeave filed its official financial statements in preparation for an IPO and stock listing. This is perhaps the first generative AI stock to hit the public markets. The company is backed by Nvidia (NVDA +0.99%) and will be followed closely.
Let's take a deeper look at the CoreWeave business and see whether investors should buy shares of this IPO.
Rapid growth thanks to AI
Originally, CoreWeave was a cryptocurrency mining operation. Crypto mining requires a lot of computing power, which led the company to acquire a ton of graphics processing units (GPUs) from Nvidia. This led to a fortuitous business model pivot. In late 2022, the cryptocurrency markets were plunging. At the same time, generative AI products were gaining traction due to the rising popularity of Chat GPT, which inspired CoreWeave to flip from being a cryptocurrency miner to being an AI cloud provider utilizing its Nvidia GPUs. In 2023, Nvidia invested $100 million in the company.
Generative AI tools -- at least how they are currently constructed -- require tons of computing power to train, operate, and scale. This is why big technology companies are planning to spend hundreds of billions on capital expenditures in 2025. There is a seemingly insatiable demand for cloud computing resources, which has customers lining up at the door urgently looking to spend money with these hyperscalers that provide it.
CoreWeave has now positioned itself as an AI-focused cloud hyperscaler, trying to compete with the likes of Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. So far, this focused cloud strategy seems to be working out well. In 2022, CoreWeave generated just $15.8 million in revenue. In 2024, revenue soared to $1.9 billion, making it one of the fastest-growing businesses in the world. It is also already profitable, generating $324 million in operating income last year, just a few years after making its product pivot.
Demand needs to show up
CoreWeave is likely to raise billions of dollars from this IPO, in which it will sell shares to the public. It has applied to list its Class A common stock on the Nasdaq Stock Market with the symbol CRWV.
It needs the money from its IPO because scaling a cloud computing business is highly capital-intensive. In 2024, CoreWeave spent $8.7 billion on capital expenditures and ended with negative $6 billion in free cash flow. In order to finance this upfront spending, the company has taken on $7.9 billion in total debt.
In its S-1 filing -- a document every company files with the Securities and Exchange Commission (SEC) before going public -- management highlights $15.1 billion in remaining performance obligations from existing customers that will be paid over the next few years. This looks great and should lead to revenue growth over the next few years.
However, it doesn't guarantee that revenue is going to show up. CoreWeave's revenue is highly concentrated, with 62% coming just from Microsoft in 2024. Microsoft runs its own competing cloud computing business and could easily take some of its spending in-house if growth in demand slows down. We also could see a broad slowdown in AI spending at any point. With all the capital CoreWeave has laid out in preparation for AI spending to show up, a slowdown could lead things to turn south for CoreWeave, and quickly.
Should you buy the CoreWeave IPO?
Unless the current market downturn -- the Nasdaq Composite has notched a correction with its drop of more than 10% from a recent high -- continues for many months, it is likely that CoreWeave stock will come out with a premium valuation. There will be a lot of excitement around this IPO, given that it is the first generative-AI-focused stock to go public, and it wouldn't shock me if the stock rocketed higher on its first trading day.
This doesn't mean you should buy the IPO. CoreWeave will likely come to market with a premium valuation while saddled with debt and burning $6 billion in free cash flow a year. That's not a great situation. The company gets over half of its revenue from one customer (Microsoft), who also happens to be a competitor. This is an immature business with a lot of risks that could materialize and bring this stock to the downside over the next few years. Savvy investors will watch how things go instead of jumping into the hype.
Generally, it is smart to avoid IPO stocks, and this one is no exception. Most IPOs underperform the market in their first year after going public due to restrictive lockup periods and insider selling that can occur after an IPO. The same may end up happening for CoreWeave. Even if you like the CoreWeave business, keep it on your watch list for now.
