Initial public offerings (IPOs) are known for being volatile, but CoreWeave (CRWV -3.66%) has taken that to an extreme.
The generative AI-focused cloud infrastructure provider limped into its IPO, undersubscribed and priced for less than its target at $40. In fact, Nvidia had to come in and help bail out CoreWeave's IPO.
After initially heading lower following the IPO in March, CoreWeave started to soar in May along with the broad market, before peaking in June with a gain of more than 300%. Since then, the stock has fallen by more than a third from its peak on concerns about valuation and the company's business model.
CoreWeave has turned into a classic battleground stock with big bets on both sides. Ahead of CoreWeave's second-quarter earnings report after hours on Aug. 12, should investors buy shares? Let's take a look at the buy, sell, and hold arguments for CoreWeave.
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Buy CoreWeave
The most obvious reason to buy CoreWeave is the company's stratospheric growth rate, which shows how fast demand is growing for AI computing power.
Revenue in the quarter jumped 420% to $981.6 million. It's unclear how big CoreWeave can get, but its growth rate holds a lot of promise.
While legacy cloud infrastructure companies like Microsoft Azure and Google Cloud are posting strong growth, CoreWeave's peer Nebius jumped on its second-quarter earnings report, a promising sign for CoreWeave's report. Nebius' revenue growth accelerated in the second quarter, improving to 625% as revenue reached $105.1 million.
Recent news items also indicate that CoreWeave remains on a hypergrowth path. In recent weeks, the company closed a $1.75 billion debt offering and a $2.6 billion debt facility, giving it more financial flexibility as it builds out new data centers. The company also announced plans to invest up to $6 billion in a new state-of-the-art data center in Pennsylvania.
CoreWeave received backing from Nvidia, and its customers are some of the most powerful companies in AI, like OpenAI, Microsoft, Meta Platforms, and Alphabet, which should support the company's growth.
Sell CoreWeave
Even CoreWeave bulls have to admit that the stock is very risky. CoreWeave is unprofitable and its business model is unproven. While the company's operating losses seem tolerable at $27.5 million, it's taken a lot of high-interest debt to fund its expansion, which will make it difficult to turn a profit on the bottom line. In the first quarter, it had $263.8 million in interest expense on nearly $9 billion in debt.
Critics have also said that CoreWeave's business model requires refreshing its data centers with new and up-to-date GPUs, which means the company could struggle to get out of debt.
The 9% rate for its newest debt shows that lenders are treating the company like a low-credit buyer.
Hold CoreWeave
There's been a lot of noise in the macro environment this year around trade policy and issues specific to the semiconductor industry like China export restrictions.
It's also difficult to assess CoreWeave's valuation when the stock is growing this fast but also losing a ton of money. The volatility in the stock further adds to the difficulty.
Investors may want to wait a few more months to see if CoreWeave can reach equilibrium and if its prospects are clearer after a couple more earnings reports.
What's the verdict?
Given the volatility in the stock, holding CoreWeave seems to make the most sense here. The stock could soar after its earnings report Tuesday night, but investors are also likely to get a pullback in the coming months, given its recent volatility and high valuation.
Over the long term, CoreWeave still has a lot of upside potential if it can maintain its triple-digit growth rate and trim its losses, so it shouldn't hurt to be patient.
