CoreWeave (CRWV 5.10%) has been struggling of late, and over the past year, its share price has been cut nearly in half. The company has experienced incredible growth due to artificial intelligence (AI) and businesses seeking out compute power, but it's been facing headwinds of late.
Recently, there's been some bad news for investors, with tech giant Meta Platforms announcing that it plans to create a business to sell excess compute power. Not only does that mean more competition for CoreWeave, but it also highlights a fairly big risk with the stock.
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CoreWeave's fundamental problem is a lack of moat
While CoreWeave has benefited from surging AI-related demand for compute power, the big risk with its business is that there is no defendable competitive advantage, also known as a moat, to protect it from competition. That's why when big tech companies such as Meta offer up their excess compute power, it can have a devastating impact on CoreWeave's growth prospects. If the companies that once were in need of compute capacity recognize they don't need as much and begin selling it, that's bad news on multiple fronts for CoreWeave, as it signals an increase in competition and less demand.
At that stage, what CoreWeave may be left to do is to compete on price, which would make it more challenging for the company to get out of the red. Last year, while the company reported $5.1 billion in revenue, more than doubling the $1.9 billion it posted in the previous year, its net loss actually grew from $937 million to $1.2 billion.
NASDAQ: CRWV
Key Data Points
This is a highly risky and speculative stock to own
As long as tech companies continue to invest heavily in AI, CoreWeave has the potential to grow significantly and see its share price rise. But as there are signs that isn't the case, such as companies signaling that they don't need as much compute power, then that can end up having the opposite effect, which is why CoreWeave's stock has been sinking of late.
CoreWeave is a speculative buy. For investors who believe there is still incredibly strong demand for all things AI-related, then CoreWeave may seem like a bargain. But for those who are a bit more skeptical, which is the group I'd fall into, it may not be as convincing that CoreWeave is a good buy right now, despite its reduced valuation. With significant losses, no significant competitive advantage, and an uncertain future, CoreWeave is an incredibly risky stock, and there's still plenty of room for it to fall further.
