AI infrastructure darling CoreWeave (CRWV -7.63%) had a rough start as a publicly traded company earlier this year when it debuted, but since then, the stock has been off to the races. Trading around $180 per share today, CoreWeave stock has more than tripled from its initial public offering (IPO) price. Unwavering demand for AI computing capacity and a major deal with OpenAI and Alphabet have seemingly erased any trepidation on the part of investors.
As with any high-flying stock, valuation isn't something to be ignored. While CoreWeave is having a moment, investors should tread carefully.
Image source: Getty Images.
Extreme expectations
CoreWeave's business model involves a lot of debt, some of it backed by its AI accelerator hardware. The company strikes long-term deals with its customers, the top two of which generated 77% of total revenue in 2024. Contracts tend to be take-or-pay, which means the customer agrees to pay for capacity regardless of whether that capacity is used . This gives CoreWeave visibility into its revenue and makes the high levels of debt less risky. As of March 31, CoreWeave had about $8.7 billion in debt. In the first quarter, the interest payments on that debt consumed 27% of total revenue.
While the debt load and customer concentration are certainly concerns, the biggest problem is valuation. CoreWeave now has a market capitalization of around $86 billion. To put that in perspective, the company's book value, or assets minus liabilities, is less than $2 billion following its IPO. That puts the price-to-book value ratio at more than 40, which is extreme for a capital-intensive company. Amazon, with its asset-heavy retail and cloud-computing businesses, currently trades for around 7 times book value.
At least one Wall Street analyst is concerned about CoreWeave's valuation. A Bank of America analyst downgraded the stock to "hold" last week, although he bumped up his price target drastically. The analyst is optimistic about the long-term picture, but in the near term, the lofty valuation is a big hurdle.
There's a lot that could go wrong
Demand for AI infrastructure is booming right now, but CoreWeave's business model may not work so well as the industry matures. The take-or-pay contracts may be a non-starter for customers once demand no longer outstrips supply, and a shift to pay-as-you-go would lead to less revenue visibility and more volatility.
CoreWeave's top customer is Microsoft, with something like two-thirds of revenue coming from the software giant last year. While Microsoft is full steam ahead on building up AI computing capacity, any change to Microsoft's plans could have an outsize impact on CoreWeave's financial performance.
AI may be the most significant technological innovation since the internet, but there's also a lot of hype involved. AI is powerful and useful, and there are likely plenty of use cases yet to be unlocked. But ultimately, even the most powerful large language models aren't doing any real "thinking" or "reasoning." The technology has limitations, and there's some evidence that AI models are hitting a ceiling in capabilities. If AI indeed runs into roadblocks, demand for AI infrastructure could grow more slowly.
Even if everything goes right for CoreWeave, a sky-high valuation means that the stock could perform poorly regardless. It's important to remember that it took 16 years for Microsoft to surpass its dot-com-era market capitalization after that bubble burst despite growing revenue and profit. CoreWeave's rich valuation is by far the biggest risk for investors.
CoreWeave's revenue will likely continue to explode as demand for AI infrastructure booms. However, investors need to take a hard look at the valuation before diving in.
