A regulatory filing made September 30 shows neocloud CoreWeave (CRWV 0.13%) signed a deal to provide Meta Platforms with $14.2 billion in computing power through 2031, with an option to extend through 2032. The deal will furnish Meta with access to Nvidia GB300 NVL72 systems, the very bleeding edge of artificial intelligence (AI) infrastructure.
Meta has been a CoreWeave customer since December 2023, so the new agreement is a clear sign the social media giant is more than satisfied with services rendered in the past. "They loved our infrastructure in earlier contracts and came back for more," CoreWeave CEO Michael Intrator told Bloomberg.
CoreWeave shares advanced nearly 12% on the news, but most Wall Street analysts still believe the stock is undervalued. Among 29 forecasts, the median target price is $157 per share. That implies 16% upside from the current share price of $136. Read on to learn more about this Nvidia-backed AI stock.
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CoreWeave is the technology leader among AI cloud services providers
CoreWeave is part of an emerging class of cloud services providers known as neoclouds, sometimes called GPU clouds. The company offers infrastructure and software services similar to traditional clouds, but its data center infrastructure is specifically designed for artificial intelligence (AI) workloads, including training AI models and developing AI applications.
Research firm SemiAnalysis recently ranked CoreWeave as the technology leader in AI cloud services, not only scoring its platform above competing neoclouds like Nebius, but also above traditional clouds like Amazon, Microsoft, and Alphabet. The analysts attributed their decision to CoreWeave's technical expertise and unmatched performance, as well as its close relationship with Nvidia.
Specifically, CoreWeave is the only neocloud capable of consistently and reliably operating clusters of 10,000+ GPUs and the company has consistently set performance records at the MLPerf benchmarks, standardized tests that evaluate AI systems across training and inference. Analysts wrote, "CoreWeave is clearly leading in providing the best GPU cloud experience."
Those qualities, coupled with its close partnership with Nvidia -- which affords CoreWeave early access to the latest GPUs -- have helped the company win major customers like Meta Platforms, Microsoft, Alphabet, and IBM. Further, CoreWeave recently announced a $6.3 billion deal with Nvidia, and it expanded an existing arrangement with OpenAI to bring the total contract value to $22.4 billion.
CoreWeave is growing quickly, but capital expenditures are accelerating
CoreWeave reported tremendous financial results in the second quarter. Revenue soared 207% to $1.2 billion and non-GAAP operating income increased 135% to $200 million. The company also said its revenue backlog increased 86% due to expanded deals with OpenAI and an unnamed hyperscale company.
However, investors should be aware that CoreWeave has taken on a substantial amount of debt. Data center infrastructure is expensive, especially when the infrastructure is built for artificial intelligence. Interest expense on debt consumed more than 20% of revenue in the second quarter, and that figure could increase in the future.
CoreWeave is spending aggressively to expand its data center capacity across the U.S. and Europe in an effort to keep pace with soaring demand. Consequently, management says capital expenditures (capex) will land between $20 billion and $23 billion in 2025, marking a substantial acceleration from $8.7 billion in 2024 and $2.9 billion in 2023.
CoreWeave only takes on debt when customer demand creates a need for more capacity, and only when a signed contract completely covers the cost of the debt. But even under those conditions, Gil Luria at DA Davidson sees a problem. "Their interest expense is higher than their operating income, which means they aren't generating enough profit to pay their debt holders," he told Yahoo Finance.
Having said that, Nvidia evidently has a great deal of confidence in CoreWeave because 91% of its $4.3 billion portfolio is invested in the company. Additionally, Wall Street thinks CoreWeave's revenue will increase at 91% annually through 2027. That makes the current valuation of 15 times sales seem reasonable. Risk-tolerant investors should think about buying a position.
