For many people, investing in the stock market is the most effective way to build wealth. Unless you're an accredited investor, accessing opportunities in private companies is rare. That said, every now and again, a private company becomes large enough that investors consider the potential of an initial public offering (IPO).
Private companies that have eclipsed a valuation of $1 billion or more are often referred to as unicorns in the financial world. CoreWeave, an artificial intelligence (AI) start-up with the financial backing of none other than Nvidia (NVDA +1.32%) , recently filed its S-1 with an expected valuation of approximately $24 billion.
While the combination of AI, support from Nvidia, and a highly anticipated IPO might sound like a recipe for making a fortune, here are two reasons why I won't be chasing CoreWeave's IPO.
1. Customer concentration
The table below breaks down CoreWeave's revenue over the last few years. While these figures are undoubtedly impressive, there's more than meets the eye here.
| Metric | 2022 | 2023 | 2024 |
|---|---|---|---|
| Revenue | $15.8 million | $228.9 million | $1.9 billion |
| Revenue growth (YOY) | Not available | 1,349% | 737% |
Data source: CoreWeave S-1 Filing. YOY = year over year.
When analyzing financial statements, investors can sometimes become enamored by a company's revenue growth to the point that they ignore some important underlying details. Sure, growing revenue over 700% and eclipsing $1 billion in annual sales are terrific milestones, but where is this growth actually coming from?
According to notes in CoreWeave's S-1, 41% and 73% of revenue in 2022 and 2023, respectively, was concentrated in three customers. Furthermore, 77% of revenue in 2024 came from only two customers.
CoreWeave goes on to disclose that its largest customer (Microsoft) accounted for 16%, 35%, and 62% of sales between 2022 and 2024. These trends not only suggest some extreme levels of customer concentration, but CoreWeave's largest client is effectively driving the bulk its growth. In other words, if Microsoft churns as a customer or decides to downgrade its contract, then CoreWeave's growth would protract in a meaningful way.
2. Soaring revenue comes at a cost
Another important part of financial analysis is looking past revenue and studying the rest of the income statement. The three major financial statements -- income statement, balance sheet, and statement of cash flows -- are intertwined. Below, I've outlined some key details that stuck out to me in CoreWeave's financial profile.
| Metric | 2022 | 2023 | 2024 |
|---|---|---|---|
| Operating expenses (per income statement) | $38.7 million | $243.4 million | $1.59 billion |
| Stock-based compensation | $1.5 million | $15.1 million | $31.5 million |
| Normalized operating expenses (excludes stock-based compensation) | $37.2 million | $228.2 million | $1.56 billion |
| Operating expense growth (YOY) | N/A | 513% | 583% |
| Interest expense | $9.4 million | $28.4 million | $360.8 million |
| Net income/(loss) | ($31.0 million) | ($593.7 million) | ($863.4 million) |
Data source: CoreWeave S-1 Filing.
When a company files its financials with the Securities and Exchange Commission (SEC), it does so under generally accepted accounting principles (GAAP). But GAAP financials can benefit from adjustments at times.
For example, many companies (especially start-ups) issue stock-based compensation (SBC) to their employees. Augmenting an employee's salary with SBC is a nice sweetener as it gives them a chance to participate in the upside of a liquidity event such as an acquisition or IPO. The catch is that SBC is tucked into operating expenses on the income statement, and it can make a company's expense profile look more inflated than it really is. The reason for that is SBC isn't a true cash expense like a contract with a vendor or a salary.
In the table above, I normalized CoreWeave's operating expenses to exclude SBC. As you can see, the company's expense profile is growing over 500% annually (and rising). And toward the bottom of the income statement, you'll see interest expense from the debt CoreWeave carries on its balance sheet. While debt isn't necessarily a bad thing, I'm a little wary in CoreWeave's case.
At the end of 2023, CoreWeave carried $1.5 billion of debt. But by the end of last year, debt had ballooned to $7.9 billion -- hence the notable rise in interest expense shown above.
According to required disclosures, CoreWeave will have roughly $8.0 billion of principal payments on its debt between 2025 and 2029, and $5.6 billion of that amount is due in the next two years. Considering the company holds only $1.4 billion of cash and equivalents and continues to burn cash at a high rate, I'm not thrilled about the company's current liquidity profile.
Final verdict
The CoreWeave IPO is garnering a lot of hype supported by a bullish AI narrative. But the underlying financial profile of the company could be stronger. Moreover, given CoreWeave's mounting losses and questionable path to profitability, I wouldn't chase any lofty valuation targets that Wall Street might be trying to sell.
My final take is that the CoreWeave IPO is a pass.
