Even if they do deploy that capital, they're destroying value: Luria on CoreWeave

Key Concepts

• Coreweave: An AI cloud computing company.
• Guidance: Financial projections provided by a company for future performance.
• Analyst Consensus: The average expectation of financial analysts regarding a company's performance.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, and equipment.
• OpenAI: An artificial intelligence research laboratory.
• Data Centers: Facilities that house computer systems and associated components, such as telecommunications and storage systems.
• Bottlenecks: Constraints that limit the output of a system.
• HVAC (Heating, Ventilation, and Air Conditioning): Systems used to control the temperature and air quality in a building.
• Core Scientific: A company involved in cryptocurrency mining and data center operations.
• Nebius: A competitor to Coreweave in the data center space.
• Return on Asset (ROA): A profitability ratio that indicates how profitable a company is in relation to its total assets.
• Hyperscalers: Large cloud computing providers such as Microsoft, Amazon, Google, and Meta.
• Sell Rating: An investment recommendation to sell a stock.
• Price Target: The price at which an analyst or investor believes a stock will trade in the future.
• Debt Holders: Individuals or entities that have lent money to a company.
• Equity Holders: Individuals or entities that own shares in a company.

Coreweave's Financial Performance and Guidance

Coreweave's stock is currently under pressure due to its full-year guidance falling below analyst consensus. While revenues came in better than expected, the company's future outlook is a cause for concern.

Capex Shortfall and Deal Renegotiation

• Original Plan: Coreweave intended to invest $20 to $23 billion in capital expenditure (capex) this year to build compute capacity.
• Revised Guidance: The company now projects only $12 to $14 billion in capex for the year, a significant reduction.
• Impact: This shortfall puts Coreweave behind schedule in its expansion plans.
• OpenAI Deal: Due to the delays, Coreweave had to renegotiate its deal with OpenAI to continue receiving payments even though they are behind on delivering capacity. This renegotiation highlights the pressure Coreweave is under.

Challenges in Data Center Expansion

The primary reason for Coreweave's struggles is the difficulty in building data centers, a process the company is described as stumbling on.

• Coreweave's Business Model: Coreweave is characterized as primarily a financial company that arranges loans, matches chips with customers, and facilitates compute capacity. They are not inherently experienced builders of physical infrastructure.
• Industry-Wide Bottlenecks: Building data centers is inherently difficult, exacerbated by current bottlenecks:
  • Land Acquisition: Difficulty in securing suitable land.
  • Power Availability: Challenges in obtaining sufficient power supply.
  • Skilled Labor: Shortage of electricians for HVAC installation.
• Core Scientific Deal: Coreweave's attempt to acquire Core Scientific to gain capacity failed. Now, Core Scientific is reportedly not delivering on its promises, further hindering Coreweave's expansion.
• Comparison to Competitors: While Coreweave is pushing out its data center expansion into next year, competitors like Nebius (which reported on the same day) are still able to deliver capacity. This suggests Coreweave's challenges are more pronounced or are being managed less effectively.

Financial Viability and Value Destruction

The financial model of Coreweave's expansion is questioned, with concerns that even if they deploy capital and fulfill their backlog, they may be destroying value.

• Backlog: Coreweave has a backlog of $55.6 billion, including 2.9 gigawatts of contracted power.
• Return on Assets (ROA): The company currently reports an ROA of approximately 4% on its existing 30+ data centers.
• Cost of Capital: Coreweave borrows capital at a cost of 9% to invest in building data centers.
• Financial Discrepancy: This creates a situation where the cost of borrowing (9%) is higher than the return generated (4%), described as "selling $10 bills for $5" or "borrowing on margin to buy treasuries." This indicates a fundamental flaw in their financial strategy for expansion.

Hyperscalers and Coreweave's Position

The transcript argues that hyperscalers (Microsoft, Amazon, Google, Meta) are benefiting from the situation, while Coreweave and its shareholders are not.

• Hyperscaler Strategy: Hyperscalers use their own cash reserves and existing customer funds to build data centers, achieving good returns.
• Incremental Players: Companies like Coreweave are incremental players that must borrow expensive debt to build infrastructure they lack experience in.
• Hyperscaler Advantage: Hyperscalers can take advantage of companies like Coreweave by securing capacity at a lower cost. This allows them to:
  • Deploy less capex themselves.
  • Reduce the drag on their margins.
  • Minimize their own borrowing needs, maintaining leverage.
• Coreweave's Role: Coreweave is essentially building capacity for hyperscalers, who will continue to buy inexpensive capacity as long as someone is willing to finance Coreweave's expansion. This is a good deal for hyperscalers but not for Coreweave or its shareholders.
• New Contract: Despite the challenges, Coreweave secured a sixth contract from a prominent hyperscaler, though the identity of the hyperscaler was not disclosed. This contract is seen as a continuation of the hyperscalers leveraging the situation.

Investment Recommendation and Outlook

Gil Lurri, head of technology research at DA Davidson, has a "sell" rating on Coreweave stock with the lowest price target on Wall Street.

• Price Target: The price target is set at $36.
• Debt Holders vs. Equity Holders: The perspective is that debt holders will effectively own all of Coreweave's assets, leaving equity holders with very little value.
• Bankruptcy and Asset Acquisition: Lurri believes that Coreweave is heading towards bankruptcy within the next few years. Post-bankruptcy, companies like Microsoft and Meta are likely to acquire Coreweave's assets at a significantly reduced price ("pennies on the dollar").

Conclusion

Coreweave's current struggles stem from ambitious expansion plans that have run into significant operational and financial headwinds. The company's reliance on expensive debt to fund data center construction, coupled with industry-wide bottlenecks and a business model that appears to be destroying value, paints a bleak picture. Hyperscalers are positioned to benefit from this situation, while Coreweave and its shareholders face substantial risks, with a potential bankruptcy and asset acquisition by larger players being a likely outcome.