Shares of artificial intelligence (AI) cloud computing upstart CoreWeave (CRWV +11.92%) sank 25.4% this week after reporting its Q3 earnings, according to data from S&P Global Market Intelligence, as of 4 p.m. ET on Friday, Nov. 14. The company is growing incredibly quickly, but is highly unprofitable and burning a lot of cash as it aims to scale up its AI infrastructure for big tech companies.
As of this writing, CoreWeave stock trades below $80, heading closer to its initial public offering (IPO) price of $40. Here's why investors are souring on CoreWeave stock after its latest earnings result.
NASDAQ: CRWV
Key Data Points
Fast growth, but at a price
On Nov. 10, CoreWeave reported its Q3 earnings for the three months ending in September. The cloud computing infrastructure provider is growing quickly, with revenue up over 100% year over year to $1.36 billion. By signing long-term deals with AI leaders such as Nvidia and OpenAI, it now has a backlog of $55 billion, giving it visibility to reinvest for growth.
Moving down the income statement, it becomes clear that CoreWeave may be winning these contracts for AI cloud computing by undercutting the competition on price. Its operating margin was just 4% in the quarter, and a large interest expense on its outstanding debt brought its net income into the red. Since the company is building out so much infrastructure for AI data centers, Coreweave is burning a ton of cash to try and prepare for upcoming spending demand. Its free cash flow was negative $8 billion over the last 12 months, which is why the company has saddled itself with debt in order to grow.
In order to get profitable, CoreWeave is going to have to grow its revenue quickly. Management put out full-year revenue guidance of $5.05-$5.15 billion, which was below analyst expectations heading into the quarter. Any slowdown in growth expectations can have a huge impact on CoreWeave's stock price, which is why shares have kept falling after these earnings results.
Image source: Getty Images.
Should you buy the dip on CoreWeave stock?
After this drop, CoreWeave now trades at a market cap of $38 billion. Compared to a backlog of $55 billion, you might think this makes CoreWeave stock an attractive buy. It is a huge beneficiary of the AI cloud revolution, and could see rapid revenue growth in the years to come.
However, in order to achieve this growth, CoreWeave is saddling itself with debt. Plus, it is only earning a slim profit margin on every sale flowing from its backlog, with a growing level of interest expense.
Despite this drop, CoreWeave looks like an incredibly risky stock to buy at current levels, and one AI investors should avoid adding to their portfolios today.
