CoreWeave Stock Decline and Financial Structure Concerns: The Current State of an AI Infrastructure Company

This morning on my commute, I saw news that the AI infrastructure company CoreWeave, which had seen its stock rise quite a bit, is now facing some turbulence.

Recently, CoreWeave's stock surged over 300% since its March IPO, but today it dropped by 6%.

The reason is that Gil Luria, an analyst from the securities firm DA Davidson, reaffirmed his negative evaluation of the company.

The core issue raised by analyst Luria is concern over CoreWeave's recently disclosed financial structure.

The company tried to present future shareholder return potential to investors based on AI infrastructure contracts, but Luria believed the explanation actually highlighted bigger risks.

Simply put, investors in the stock may not receive profits during the contract period.

The company plans to raise only 15% of the funds through equity by selling 15% of shares for this infrastructure investment, covering the remaining 85% with debt, which is seen as a heavy burden.

Luria estimated that the debt's interest rate could reach up to 9.5%, with additional debt-related costs exceeding $590 million.

This makes it difficult for profits to flow back to shareholders.

Another problem was concerns over asset value depreciation.

For example, Amazon AWS cut the price of its H200 GPU by 50%, which means that in four years, the asset’s resale value might drop to less than 25% of the current price.

It’s easy to understand this by thinking of it like a used car’s depreciation.

Also disclosed was the fact that the current loan interest rate the company bears is 12.5%, higher than the 9% initially reported to investors, indicating a greater interest cost burden.

These factors combined led DA Davidson to believe CoreWeave’s stock price could fall much lower, potentially below $5 per share long term.

The market has generally viewed CoreWeave as having a strong order pipeline due to its deep collaboration with semiconductor giant NVIDIA, but these financial structure issues signal investors should be cautious.

However, DA Davidson acknowledged that if CoreWeave can raise more than $10 billion in new funds at this level, it could overcome its difficult financial situation and justify its projects over the next two years.

While this would cause stock dilution, it’s seen as a way to maintain the company’s growth potential.

In conclusion, CoreWeave’s stock soared on AI infrastructure growth expectations, but the reality of its financial structure and debt burden has emerged as pressure on its stock price, signaling investors should approach carefully.

Looking at this, we’re reminded how important it is to scrutinize financial structures even when AI-related companies are in the spotlight.