According to James Mackreides, the AI infrastructure company Coreweave is headed for trouble and is incredibly expensive
When OpenAI introduced ChatGPT three years ago, interest in AI skyrocketed and many of the biggest tech companies in the world saw their stocks soar. But in addition to companies like Microsoft and Nvidia, shares of numerous smaller businesses have also skyrocketed as a result of their contribution to the development of the infrastructure needed for AI adoption. Investors are beginning to question whether all of this money spent on the new technology will be profitable, though.
Some of the more controversial AI-infrastructure plays, like Coreweave (Nasdaq: CRWV), are being impacted by their skepticism. Coreweave generates revenue by constructing data centers with top-tier computer hardware that supply the enormous amount of processing power required to train businesses' AI models. It then leases the data centers to businesses that are prepared to pay for them. This appears to have been successful thus far, as sales have skyrocketed from £15.8 million in 2022 to an estimated £5.1 billion this year due to explosive demand. By the end of 2026, this amount is predicted to more than double to £11.9 billion.
The business strategy of Coreweave is not viable.
Nevertheless, a closer examination reveals that the business model is not viable. According to Sahm Adrangi of Kerrisdale Capital, managing data centers is a business that rewards scale, which is why big cloud computing companies like Amazon Web Services, Microsoft Azure, Google Cloud, and Oracle dominate it.
Coreweaves has had to offer significant discounts and reduce profit margins in order to compete with these players due to its relatively small size. Furthermore, because most computer hardware becomes outdated within a few years due to Moore's Law, renting computer power can be a risky business.
Andrangi contends that Coreweave will find it difficult to generate enough revenue to cover the initial costs of constructing the data centers, let alone provide a respectable return on investors' capital, even in the best-case scenario where demand for processing power keeps growing. Given that it has taken on significant debt to finance its investment, Coreweave may face severe difficulties if demand declines, the hardware becomes outdated sooner than anticipated, or businesses begin constructing their own data centers. The fact that the company's key insiders have begun to sell their shares is another cause for concern.
Investors have very high expectations for Coreweave's future success because it is currently valued at about ten times current sales. Additionally, the stock has dropped by almost a quarter in the past month alone, indicating that the market is beginning to lose patience. It has now dropped by more than half from its summertime highs. This implies that going short at the current price of £88, or 22 per £1, is a good idea. Considering the volatility of tech shares, I advise you to cover your position if the price reaches £132, which gives you a potential downside of 968.
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