During the last two years, artificial intelligence (AI) has emerged as a generational megatrend rarely witnessed in the capital markets. While the S&P 500 posted total returns of 26% and 25% during 2023 and 2024, respectively, a closer analysis of these trends shows that investors have largely flocked to a small cohort of megacap stocks over the last couple of years.
The collective performance of the "Magnificent Seven" -- Nvidia, Microsoft, Alphabet, Amazon, Meta Platforms, Apple, and Tesla -- has played an outsize role in fueling the market to new highs.
However, this year has gotten off to a rough start for the Magnificent Seven, with each member except Meta posting a negative return year to date as of this writing.
From a macro perspective, I suspect that uncertainty over tariffs, as well as ongoing spending for AI infrastructure have left some investors tepid over the near-term prospects of their once-favorite stocks. In addition, some of them may simply be fatigued by the Magnificent Seven and are looking for new growth opportunities.
And what better place to look for growth than an initial public offering (IPO), right? Well, maybe.
Let's explore AI's hottest new IPO stock: a data center infrastructure specialist backed by Nvidia called CoreWeave. After analyzing a couple of high-profile technology IPO stocks from recent years, my hope is that investors will come away with a clear idea of whether or not investing in the CoreWeave offering is a prudent choice right now.
1. Analyzing the Snowflake IPO
In September 2020, enterprise software company Snowflake went public on the New York Stock Exchange. This was one of the most hyped IPOs that I can think of in recent memory.
With backing from some of the most prestigious venture capital firms in the world -- including Sequoia, Altimeter, and Redpoint -- as well as notable strategic investors, such as Salesforce and none other than Warren Buffett's Berkshire Hathaway, Snowflake looked like a no-brainer opportunity.
Shares opened at $245 on its first day of trading and rose as high as $319. By the end of its first day as a public company, Snowflake had made it into the record books, becoming the largest software IPO in history.
There was undoubtedly a high degree of euphoria during its early days as a public company, but the enthusiasm was short-lived. When AI emerged as the market's next big catalyst a couple of years ago, Snowflake's foray into the space was suspiciously quiet. Unlike some of its software counterparts, it failed to captivate investors and sell them on how AI was going to be a transformative opportunity underscored by long periods of high-margin growth.
A few years after its IPO, Snowflake's CEO resigned and Berkshire Hathaway dumped its entire position in the software company.
The chart above illustrates the stock's return since going public. As you can see, the company experienced multiple sudden price jumps during some early periods as a public company. But over the last couple of years, investors have largely soured on the stock, with shares now down roughly 38% since inception.
Image source: Getty Images.
2. Analyzing the Palantir IPO
Just two weeks after Snowflake went public, a peer in the enterprise software landscape, Palantir Technologies, made its debut on the New York exchange.
The storyline around Palantir at the time of its IPO was quite the opposite compared to Snowflake. Few on Wall Street had a firm grasp on its business model.
Moreover, the company's close (and secretive) relationship with the Department of Defense inspired many investors to view Palantir as a government contractor or a consulting agency, and less so as a true technology platform.
Its first day of trading wasn't too special. Shares opened up at $10 and closed slightly lower around $9.50.
For the first couple of years as a public company, one of its largest challenges was winning over institutional investors. In a paradox for the ages, it actually was the rise of AI that started turning heads on Wall Street from Snowflake to Palantir.
Following the company's release of its Artificial Intelligence Platform in April 2023, Palantir has done an impressive job diversifying its business beyond government contracts. It is now working closely with many of the largest AI developers in the private sector, including Microsoft, Amazon, Oracle, Meta Platforms, and Databricks.
By unlocking new opportunities in the commercial sector, Palantir has been able to accelerate revenue growth while simultaneously widening profit margins and minting free cash flow on a consistent basis. What was once a stock that sat in the shadows of the tech realm just three short years ago swiftly transitioned into one of the top-performing stocks in the S&P 500 last year.
In fact, if you invested in Palantir at the time of its IPO and held through today, you would be sitting on a gain of 838%.
The final verdict
Narratives surrounding CoreWeave's upcoming IPO are echoing that of Snowflake. CoreWeave is not only the first major IPO for an AI unicorn in recent years, but a successful public debut could also set the stage for a flood of high-profile private technology companies yearning to hit the public exchanges.
This article underscores one clear point: Investing in a stock at the time of an IPO carries quite a bit of risk.
I think the hype surrounding CoreWeave could inspire some outsize buying activity, and investors who aren't careful could get caught up in a nasty momentum trade and end up holding the bag.
To me, the most prudent strategy is to let time pass and assess CoreWeave's operating performance for its first few quarters as a public company. Long-term investors will have ample buying opportunities at various price points should they choose. But for now, I think the safer option is to let the IPO shake out, and astute investors are better off monitoring the company's progress over the next several months.
Over time, CoreWeave's stock price should begin to follow a more fundamental trajectory based on the company's actual underlying results.
