For technology investors, generative artificial intelligence (AI) is the gift that keeps on giving. Since the launch of OpenAI's ChatGPT in late 2022, billions of dollars have flowed into the sector as people rush to get exposure to what looks like a once-in-a-lifetime opportunity.
Cloud computing provider and AI hyperscaler CoreWeave (CRWV 2.27%) aimed to capitalize on some of this optimism with an initial public offering (IPO) in March. But so far, the hype has failed to lead to sustainable stock price growth. Let's dig into the pros and cons of CoreWeave to decide if it is a buy.
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What is CoreWeave?
Founded in 2017 under the name Atlantic Crypto, the company that would become CoreWeave got its start in cryptocurrency mining -- a process that uses powerful graphics processing units (GPUs) to solve computational problems and mint new digital assets. Eventually, demand shifted away from crypto, and the company realized that it could rent out its computing power to other companies wirelessly via the cloud.
NASDAQ: CRWV
Key Data Points
This pivot brought the company into direct competition with hyperscalers like Amazon Web Services (AWS) and Microsoft's Azure, which offer similar services. But CoreWeave managed to differentiate itself by providing a much better deal for clients. The company claims its services are up to 35 times faster and 80% less expensive than legacy cloud providers. And this may be because of its specialization in GPU-intensive workloads compared to other general-purpose cloud service providers.
GPUs are critical for running and training large language models (LLMs) like ChatGPT because of their ability to do multiple tasks simultaneously (parallel processing). Cloud computing allows enterprise clients to access these capabilities without having to build out their own hardware clusters. CoreWeave's third-quarter revenue jumped by 134% year over year to $1.36 billion.
What are the challenges?
Despite the epic top-line growth rate and compelling niche, CoreWeave's recent stock price performance doesn't make it look like a red-hot AI company. Shares have declined over the last six months.
What's spooking investors? For starters, the company has alarmingly low operating margin -- a metric that measures how much profit it generates from core operations (before accounting for outflows like interest and taxes). In the third quarter, operating margin dropped from 20% to just 4%, which is abysmal compared to AI leader Nvidia, which boasted over 60% in its second quarter.
On the surface, it's hard to understand why a cloud computing company would have such weak margin, considering that it sells services instead of manufacturing and delivering physical products. However, the challenge comes from CoreWeave's "technology and infrastructure" spending. This includes the operating costs and depreciation of its massive data center buildouts, which include thousands of expensive GPUs that consume significant energy when they are used.
To make matters worse, CoreWeave's balance sheet is extremely weak. The company has a whopping $10.3 billion in long-term debt (compared to just $1.89 billion in cash and equivalents). This money will have to be paid back eventually, which puts further strain on CoreWeave's already weak cash flow while generating massive interest expense ($310.6 million in the third quarter alone).
Is the stock a millionaire maker?
Right now, investors shouldn't be thinking about how much they could make from CoreWeave stock. Instead, they should be worried about how much they could lose. Despite enjoying a place in a compelling niche and rapid growth, its business model looks fundamentally unworkable because of its rock-bottom operating margins and deteriorating balance sheet.
Right now, CoreWeave benefits from positive momentum because of the strong demand for its cloud GPU services. But if AI-related demand stalls or reverses, the company could easily plummet. The risks dramatically outweigh the potential rewards and I don't think it's a millionaire maker.
