The arrival of artificial intelligence (AI) has been a boon for CoreWeave (CRWV +1.22%). The AI infrastructure specialist went public at the end of March around $40 per share, and by June, the stock had skyrocketed to a $52-week high of $187.
Since then, the company's share price has plunged over 50%, as CoreWeave experienced growing skepticism from Wall Street. The reaction is understandable considering its stock's meteoric rise and sky-high valuation.
Does the company's share price decline mean it was caught up in the AI frenzy and its best days are behind it? Or is this a chance to buy at a discount for the opportunistic investor? Let's dive into CoreWeave to arrive at an answer.
Image source: Getty Images.
CoreWeave's switch to the neocloud
CoreWeave falls into a niche within the cloud computing industry called neoclouds. A neocloud is a cloud provider that specializes in data center infrastructure optimized for AI. The company began as a cryptocurrency mining business, but realized its investment in cutting-edge semiconductor chips could meet the need for AI horsepower.
Artificial intelligence requires enormous computing capacity to crunch through the considerable data needed to execute tasks. This caused a surge in demand for AI-optimized data centers. CoreWeave was among the companies that stepped in to fill this gap.
As a result, CoreWeave's sales have soared, with third-quarter revenue rising 134% year over year to $1.4 billion. Customers include AI luminaries such as ChatGPT creator OpenAI, Facebook parent Meta Platforms, and Microsoft.
NASDAQ: CRWV
Key Data Points
CoreWeave's perilous financials
To maintain sales growth, CoreWeave must continue to invest in expanding data center capacity. This is a costly endeavor, resulting in Q3 capital expenditures of $1.9 billion.
To fund its expansion, the company took on massive debt totaling over $14 billion by the end of Q3. Moreover, CoreWeave isn't profitable, suffering a Q3 net loss of $110.1 million. The situation puts the neocloud provider in a precarious financial position.
CoreWeave is working to sustain its operations for the long term. It implemented a business unit in October dedicated to growing U.S. government sales. This is a promising strategy since AI is a priority for the Trump administration.
In addition, CoreWeave entered into a deal with Nvidia worth $6.3 billion. According to a filing with the Securities and Exchange Commission, if the neocloud provider has excess data center capacity, "Nvidia is obligated to purchase the residual unsold capacity through April 13, 2032." This cushions CoreWeave against lost revenue if demand softens over the next several years.
Deciding on CoreWeave stock
The Nvidia partnership provides some financial security, while CoreWeave's share price drop has improved the company's stock valuation, as measured by the price-to-sales (P/S) ratio.
Data by YCharts.
The chart shows CoreWeave's P/S multiple is lower in January than it's been for a large part of the past year. This indicates CoreWeave's valuation has become more reasonable.
That said, investing in the company remains fraught with risk given its excessive debt and lack of profitability. But for investors with a high risk tolerance, CoreWeave may prove a good investment over time if the company can strengthen its financials and reduce reliance on a handful of large AI customers.
