Generative AI is one of the most explosive tech megatrends in recent memory, promising to change the way people live and do business. But that doesn't mean every AI company will be a long-term winner. Based on the challenges that cloud infrastructure provider CoreWeave (CRWV +0.85%) is facing, it might be time to sell the stock.
Profit looks far away
At the end of the day, companies exist to make profits for their shareholders. When this doesn't happen -- or worse, when it looks like it might never happen -- that is cause for alarm. CoreWeave's operational results put it in this category. While its net revenue in the third quarter soared by an eye-popping 133% year over year to $1.36 billion, the devil is in the details.
NASDAQ: CRWV
Key Data Points
While its revenues are growing fast, so are its expenses. In fact, CoreWeave's third-quarter operating expenses stood at $1.31 billion, giving it an operating margin of just 4% compared to 20% in the prior-year period. The company also faces significant and growing interest expenses due to its reliance on debt financing to buy hardware and build its data centers. When this is factored in, CoreWeave generated a net loss of $110 million in Q3, or a loss of $0.22 per share.
These numbers might sound shocking for a tech company, because the industry usually has high margins. For example, AI infrastructure giant Nvidia usually boasts operating margins above 50%. And CoreWeave isn't even selling physical products that it has to manufacture or ship. However, its operational weakness begins to make more sense when you look more closely at its problematic business model.
CoreWeave has a weak business model
Unlike Nvidia, which designs and sells the graphics processing units (GPUs) needed to train and run generative AI large language models, CoreWeave operates as a middleman. It buys these high-priced GPUs and deploys them in clusters, which it rents out to end users via its cloud computing platform. But due to GPU demand that well exceeds supply, Nvidia has extreme pricing power, and customers like CoreWeave must bear the brunt of that.
A single advanced AI accelerator can cost tens of thousands of dollars, and CoreWeave is buying thousands of them. This dynamic exposes the company to massive depreciation expenses as the hardware ages, becomes outdated, and must eventually be replaced. CoreWeave is also funding a lot of its hardware purchases with debt, which creates interest expenses. As of the end of the third quarter, the company had $10.3 billion in non-current debt -- up 89% from the prior-year period. And it faced interest expenses of $310.6 million, further impeding its long-term profit potential.
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CoreWeave also lacks an economic moat, which will make it difficult to pass on its high costs to consumers. Hyperscalers like Amazon, Microsoft, and Google offer similar services on their cloud service platforms, but they have an advantage. They're also making use of custom AI chips -- aka, application-specific integrated circuits -- that can reduce their reliance on expensive third-party hardware.
CoreWeave's valuation is too high
CoreWeave's long-term challenges with margins and debt, as well as its lack of a moat, should be enough to make investors think twice before buying the stock. While the company has been a clear beneficiary of the hype surrounding generative AI infrastructure stocks, it isn't creating real shareholder value. The market is already losing confidence in it -- the shares are down by around 58% from the all-time high of $184 the set in June.
The declines look likely to continue in 2026 and possibly beyond because with a price-to-sales ratio of 8.8, CoreWeave stock is still dramatically overpriced compared to the S&P 500 index's average of just 3.5. Investors who feel bullish about the generative AI industry should look for better opportunities.
