‘Exact wrong time' to test demand for AI stocks, says Risk Reversal's Dan Nathan on CoreWeave IPO

CoreWeave IPO Analysis: A Skeptical Perspective

Key Concepts:

• Data center leasing
• GPU depreciation
• Customer concentration
• Generative AI investment
• Capacity constraints
• Short selling

Investment Recommendation: Avoid CoreWeave IPO

Dana expresses strong reservations about investing in CoreWeave's IPO, stating he "wouldn't buy this with my worst enemy's money," potentially referencing Elon Musk's involvement as a customer.

Business Model Concerns: Long-Term Leases and GPU Depreciation

• Long-Term Leases: CoreWeave enters into long-term leases for data centers, which Dana views as a risk.
• GPU Acquisition: The company raises capital to purchase GPUs, primarily Hopper generation.
• Depreciation Risk: CoreWeave depreciates its GPUs over six years, but Dana believes they will become obsolete in approximately two years. This discrepancy could lead to faster depreciation requirements and financial strain.

Financial Risks: Debt and Equity

• Debt Burden: CoreWeave relies on debt to fuel its growth.
• Limited Equity: The company was unable to raise a significant amount of equity during the IPO.
• Capital Raising: The company needs to continue to raise debt to grow.

Customer Concentration Risk: Microsoft Example

• Customer Concentration: CoreWeave's customer base is highly concentrated, with Microsoft accounting for 62% of sales.
• Workload Importance: Microsoft's leased capacity from CoreWeave likely supports less critical workloads.
• Cancellation Risk: If Microsoft develops overcapacity in its own data centers, it may cancel its leases with CoreWeave.

Generative AI Investment Alternatives

• Lack of Innovation: Dana considers CoreWeave the "least innovative way" to invest in the generative AI space through public markets.
• Private Market Alternatives: He suggests exploring investments in private companies like OpenAI, Anthropic, and Cohere, which are more innovative and likely to have greater pricing power.
• Capacity Overbuild: Dana believes there is currently no real capacity constraint in the data center market and that CoreWeave may have overbuilt.

Potential Short Selling Opportunity

• Negative Investor Sentiment: Dana heard from equity capital markets groups that there is a lack of investor interest in buying the stock.
• Short Borrow Interest: Some investors are considering shorting the stock if it experiences an initial price surge.
• Analyst Ratings: Dana anticipates that Goldman Sachs, JP Morgan, and Morgan Stanley may not issue "buy" ratings when they initiate coverage on the stock.
• Hedge Fund Interest: Hedge funds are expected to take opportunistic short positions, especially after the IPO.

Conclusion

Dana presents a highly skeptical view of CoreWeave's IPO, citing concerns about its business model, financial risks, customer concentration, and lack of innovation compared to other generative AI investment opportunities. He suggests that the stock may be a potential short-selling opportunity for opportunistic investors.