On Monday, data center company Applied Digital announced two 15-year lease agreements with CoreWeave, an AI infrastructure company. The news sent CoreWeave’s stock soaring by more than 40% over the next few days.
Such double digit percentage gains have become par for the course during CoreWeave’s brief life as a publicly traded stock. On May 27, the stock jumped over 20% after the company announced $2 billion in senior notes, and on May 16 it popped 22% on news that Nvidia infused it with a $900 million investment. The stock tumbled 17% on Thursday, but was back up 4% in midday trading on Friday. Even for a high beta stock, the overall trendline is overwhelmingly positive: Coreweave’s stock is up a whopping 250% since its March IPO, with the company’s market cap now roughly $70 billion.
This has baffled many Wall Street analysts who believe the company is in a precarious financial situation despite the explosive revenue growth logged on its top line. “Nothing from a fundamental perspective would support the magnitude of change that we’ve seen in the stock since the IPO,” says Nick Del Deo, a managing director at MoffettNathanson who covers CoreWeave and other tech companies.
Of the 19 analysts who cover the company, just three had a “buy” rating on the stock and four others had positive opinions while the consensus rating is firmly “hold” as of June 6. The average price target among all analysts who cover the stock is $72.61, well below the $145 level Coreweave was trading at on Friday and the 52-week high of $166.63.
Some analysts believe the demand for the stock is being driven by retail investors who, on average, engage in contrarian and momentum-driven trading and may be eager to invest in CoreWeave due to its multi-billion dollar contracts with Nvidia, OpenAI, Microsoft and other major companies propelling AI. It’s worth noting that institutional investors like Coatue Management and Jane Street do hold CoreWeave positions worth over $1 billion each.
Big announcements like the Applied Digital leases are one factor driving up shares of the stock. An even more fundamental dynamic is that investors are looking for ways to capitalize on the success of OpenAI, which is privately held, and see CoreWeave as one of the few vehicles for exposure in the public markets. OpenAI owns a percentage of CoreWeave and signed a multi-billion deal as its cloud infrastructure provider until April 2029. Plus, CoreWeave is a preferred partner of Nvidia, currently the most valuable company in the world by market cap, which is also an investor in CoreWeave.
CoreWeave “is positioned to capture meaningful share of an AI cloud provider market growing at a server-melting pace,” wrote Mizuho’s Gregg Moskowitz, who has an “outperform” rating on the stock, in a note after the company’s released its quarterly earnings report in mid-May. In the first quarter, CoreWeave beat revenue estimates by over 10% and forecasted second-quarter above consensus predictions, too, per Yahoo Finance. Moskowitz and the other optimistic CoreWeave analysts did not respond to Fortune requests for comment.
Coreweave posted revenue of $981.6 million in the first three months of the year, up a staggering 420% from the year-ago period. The meteoric growth reflects Coreweave’s well-timed pivot to AI. Founded in 2017 by three commodity traders, Coreweave began as an ethereum mining company. In 2019 it pivoted to cloud infrastructure to enhance GPU capabilities, attracting investment and chips from Nvidia–beginning its journey to the upper echelons of AI computing.
The GameStop effect?
The company’s public market debut was not auspicious. Coreweave reduced the price range of the offering, and the stock finished its first day trading just one penny above its $40 IPO price.
For analysts skeptical about CoreWeave’s value, their dim view is driven by the company’s debt-saddled balance sheet, its ultra-dependence on Microsoft, and customers’ development of proprietary technologies to replace contracts with the cloud computing company.
The bullishness of day traders and bearishness of investment professionals may be creating a short squeeze situation similar to the GameStop one that rocked markets in 2021 by causing the stock to go from $17 to $483 over the course of a month. The volatility of the CoreWeave in this instance is amplified by its low float—meaning that only a small amount of shares are available for purchase. It would make sense that CoreWeave could be a short squeeze target: short interest is approximately 8.44% of its float, well above the 2% to 5% average across U.S. stocks, though still far below the 140% of GameStop near the onset of its famous squeeze.
One Coreweave short seller experiencing the squeeze is Felix Wang, a managing director and partner at Hedgeye Risk Management. Yet, Wang maintains his short position despite facing potentially enormous losses. His argument is multifaceted but boils down to the company’s net debt, lease liabilities and its dependence on Microsoft and a tiny handful of others for the bulk of its revenues. “Investors should be more concerned about their operating and financial obligations,” he tells Fortune.
This is because the company has a 387% debt-to-equity ratio, -38.7% profit margin and $11.9 billion debt with just $1.28 billion in cash. These fundamentals combined with the fact that Microsoft accounted for over 70% of CoreWeave’s revenue last quarter leads Wang to compare CoreWeave to WeWork at the time of its failed 2019 IPO.
Wang looks at CoreWeave’s creditors Blackstone and Magnetar Financial. He says that these lenders are currently charging CoreWeave 10% to 15% interest on its debt and will have provisions to charge higher interest and accelerate the repayment schedule if CoreWeave’s clients like Microsoft end or downgrade partnerships with the cloud provider. “If your customers are the most highly-rated AAA clients in the world, other than OpenAI, then why are you paying 10% to 15% interest by yield on your debt agreements?” ask Wangs.
CoreWeave’s debt obligations have, in-part, led D.A. Davidson Head of Research Gil Luria to rate the stock as an underperformer. He explains that CoreWeave’s debt obligations are so large that equity holders own a very little portion of the company. Plus, CoreWeave customers Microsoft and Google are building products to directly compete with it, he says. “The only reason that they’re using CoreWeave is that CoreWeave was able to build quickly enough while Microsoft and Google weren’t getting enough chips from Nvidia,” leading them to ink three- or five-year deals with CoreWeave, he says. “Their need for CoreWeave will go away within the life of the contract.”
These incredulous analysts may be vindicated in September when the lockup period on the IPO expires in September and restricted shareholders can offload their CoreWeave holdings and the stock price will drop. But as CoreWeave’s stock bounced back Friday after plunging 17% on Thursday, perhaps the only thing that’s clear is that the AI company will continue to leave believers, and skeptics, scratching their heads.
