AI Start-Up Supported by Nvidia Plans for IPO: Is It Worth Investing in the Shares?
Energizing the Stock Market: The AI-Powered IPO Wake-Up Call
In a chilling market climate since 2021, the Initial Public Offering (IPO) scene has been as frigid as an Arctic winter. However, a potential thaw may be on the horizon, as the AI cloud start-up, CoreWeave, is set to shake up the market with its forthcoming IPO. Could this introduction of generative AI into the public sphere be the jolt the IPO market has been yearning for?
Last week, CoreWeave submitted its financial statements, preparing for an IPO and the initiation of stock trading. Proudly backed by Nvidia (NVDA 5.27%), this venture into the public eye is sure to garner attention. But is investing in CoreWeave's IPO a wise move for potential shareholders? Let's delve deeper into the CoreWeave business and explore the pros and cons of purchasing these IPO shares.
From Cryptocurrency to AI Cloud Dominance
CoreWeave first inched its way onto the business stage as a cryptocurrency mining operation, fueling its rise by acquiring an abundance of graphics processing units (GPUs) from Nvidia. As fate would have it, this happened during a cryptocurrency market nosedive. However, a brilliant trend was on the horizon - the burgeoning popularity of ChatGPT and other generative AI products. This prompted CoreWeave to recraft its business model, transforming into an AI cloud provider that capitalized on the Nvidia GPUs it had accumulated. In 2023, Nvidia invested $100 million in the company, paving the way for CoreWeave's meteoric growth.
Generative AI tools, despite their current manifestation, necessitate prodigious amounts of computing power to train, scale, and operate. This insatiable demand for software resources has technology titans planning to fork over hundreds of billions on capital expenditures for 2025. The appeal of cloud services has customers knocking impatiently at the door, eager to spend lavishly with these hyperscalers eager to meet this colossal need.
Positioning itself as an AI-centric cloud hyperscaler, CoreWeave is now squaring off against behemoths like Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. Competing in the cutthroat cloud realm, CoreWeave has managed to carve out a niche for itself. In 2022, the company brought in an modest $15.8 million in revenue. In 2024, revenue surged to an astonishing $1.9 billion, cementing its status as one of the most rapidly growing ventures on the planet. The company is already profitable, generating an impressive $324 million in operating income in 2024, barely three years after its product pivot.
Will Demand Materialize?
CoreWeave is expected to raise billions through its IPO, selling shares to the general public. The company plans to list its Class A common stock on the Nasdaq Stock Market, under the ticker symbol CRWV.
Scaling a cloud computing business is a capital-intensive enterprise. In 2024, CoreWeave sank an eye-watering $8.7 billion on capital expenditures and ended the year with a negative $6 billion in free cash flow. To finance this initial expenditure, the company has accrued $7.9 billion in total debt.
In its S-1 filing, management points to $15.1 billion in remaining performance obligations from existing customers that will be paid out over the next few years. While this figure suggests that revenue will increase, it does not guarantee that a deluge of revenue will materialize. CoreWeave's revenue is notably concentrated, with 62% coming exclusively from Microsoft in 2024. Microsoft, a formidable competitor, maintains its own cloud computing venture and has the potential to divert a portion of its spending to this in-house endeavor if demand slackens. We could also witness a slowdown in AI spending at any given moment. With the considerable capital CoreWeave has committed to AI spending, a decline could spell trouble for CoreWeave, potentially very quickly.
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Should You Invest in the CoreWeave IPO?
Absent a market crash that persists for months, CoreWeave's IPO is likely to debut with an inflated valuation. This enthusiasm is sure to send share prices soaring on the first trading day. However, this doesn't mean investors should jump on the bandwagon. CoreWeave is poised to hit the market with a premium valuation, burdened by debt and burning through $6 billion in free cash flow annually. Does this financial outlook sound appealing to savvy investors? Probably not.
CoreWeave is a young, risk-laden venture with several potential pitfalls. Avoiding IPO stocks is usually a sound strategy, and this IPO is no exception. Shunning the hype and keeping a watchful eye on CoreWeave's progress may be the wiser choice.
- With its forthcoming IPO in 2023, AI cloud start-up CoreWeave, backed by NVIDIA, seems poised to disrupt the market, potentially rejuvenating the stagnant IPO scene.
- As CoreWeave prepares to list its Class A common stock on the Nasdaq Stock Market under the ticker symbol CRWV, investors may question whether investing in its IPO is a wise move, given the company's substantial capital expenditures and debt.
- Competing against tech giants like Amazon Web Services, Microsoft Azure, and Google Cloud, CoreWeave has demonstrated rapid growth, generating $324 million in operating income in 2024, only three years after its product pivot.
- Despite the anticipation of billions in revenue from its IPO, CoreWeave's future profitability remains uncertain, with 62% of its 2024 revenue coming solely from Microsoft, a formidable competitor that could potentially divert spending to its in-house cloud computing venture.