Core Scientific purchase doesn't add any profits to CoreWeave, says D.A. Davidson's Gil Luria

Key Concepts

• CoreWeave: A company brokering deals to buy GPUs for data centers.
• Core Scientific: A company buying land and building data centers, previously the sole supplier to CoreWeave.
• Financial Engineering: Structuring transactions to improve financial results, potentially without underlying business improvement.
• Energy Contracts: Agreements to secure energy supply for data centers, becoming increasingly valuable.
• Unit Economics: The profitability of a single unit of a business (e.g., a single data center).
• Bitcoin Mining: The process of verifying and adding new transactions to the Bitcoin blockchain, requiring significant computing power and energy.
• Crypto Winters and Summers: Cyclical periods of low (winter) and high (summer) demand and profitability in the cryptocurrency market.

CoreWeave's Acquisition of Core Scientific: A Critical Analysis

1. Financial Engineering vs. Strategic Acquisition

• Analyst's Perspective: The analyst, Gloria, suggests the acquisition is primarily a form of financial engineering. CoreWeave is essentially ensuring Core Scientific doesn't sell its data center capacity to competitors by acquiring the company.
• Core Scientific's Financial Status: Core Scientific is described as unprofitable, with negative cash flow. Acquiring it doesn't inherently improve CoreWeave's profitability.
• Synergy Concerns: The analyst argues that there's limited synergy between the two companies due to their different business models. CoreWeave brokers GPU deals, while Core Scientific builds data centers.
• Energy Security: The primary motivation is securing energy contracts, which are becoming increasingly scarce and valuable for data centers.
• Expensive Stock: CoreWeave is using its "very expensive stock" (high-valued shares) to secure these energy resources, which may not be the most efficient use of capital.

2. Profitability and Unit Economics

• Negative Unit Economics: CoreWeave's fundamental problem is its negative unit economics. It borrows at 12.5% interest but only generates 5% returns on its assets.
• Analogy: The analyst compares this to taking a 12.5% margin loan to buy treasuries yielding 5%, highlighting the unsustainable nature of the business model.
• Scaling Doesn't Help: Scaling a business with negative unit economics doesn't improve profitability.

3. Cost Savings and Synergies: Skepticism

• CEO's Claims: The CEO claims cost savings, such as not paying rent for 15 years and accessing cheaper financing.
• Analyst's Rebuttal: The analyst dismisses these claims, arguing that Core Scientific was already CoreWeave's sole supplier. There are no significant costs to cut out.
• Expense Transfer: The analyst describes a scenario where Core Scientific takes $1.05 of expenses, sells them to CoreWeave for $1, who then sells that dollar for $1.05. Collapsing these doesn't create value.

4. Impact on Bitcoin Miners and Data Center Valuation

• Increased Value for Data Center Assets: The deal makes Bitcoin miners more valuable because the underlying asset (data centers with access to power) becomes more valuable.
• Competitive Landscape: Bitcoin mining is highly competitive, with returns fluctuating based on crypto market cycles.
• Scarcity Value: The scarcity of data centers with access to power increases their value, especially during periods of high demand (crypto summers).
• Good Deal for Core Scientific: Core Scientific received an "amazing price" for a company that was bankrupt less than two years ago, due to the unique value of its data center assets.

5. Notable Quotes

• "What they're really doing is they're spending their very expensive capital, their very expensive value of their shares in order to secure those energy contracts."
• "That would be like taking a 12.5% margin loan to buy treasuries, yielding 5%. It doesn't matter how much you scale that. That's not a good business, right?"
• "Core Scientific got an amazing price for a company that was bankrupt less than less than two years ago."

6. Technical Terms

• GPU (Graphics Processing Unit): A specialized electronic circuit designed to rapidly manipulate and alter memory to accelerate the creation of images in a frame buffer intended for output to a display device.
• Data Center: A dedicated space with infrastructure (power, cooling, networking) to house computer systems and associated components.

7. Logical Connections

• The acquisition is driven by the need to secure energy contracts, but the analyst questions whether it's the best use of CoreWeave's capital.
• CoreWeave's negative unit economics are a fundamental problem that the acquisition doesn't solve.
• The deal benefits Core Scientific by providing a high exit price, and it increases the value of data center assets in general.

8. Synthesis/Conclusion

The acquisition of Core Scientific by CoreWeave is primarily motivated by securing energy contracts for data centers, a strategic move given the increasing scarcity of energy resources. However, the analyst raises concerns about the financial engineering aspect of the deal, the lack of synergy between the two companies, and CoreWeave's underlying negative unit economics. While the deal benefits Core Scientific and increases the value of data center assets, it's questionable whether it will significantly improve CoreWeave's long-term profitability. The analyst is skeptical of the claimed cost savings and believes the deal is primarily about securing energy supply rather than creating a more profitable business.