Coreweave, the darling of the AI infrastructure boom, is facing a harsh reality check. While the demand for AI compute power is undeniable, questions are emerging about whether Coreweave’s business model can translate its impressive growth into sustainable profitability, casting a shadow on the valuations of other AI-adjacent plays.
The AI gold rush, ignited by breakthroughs and soaring stock prices of giants like Nvidia, has created a fertile ground for companies providing the picks and shovels – in this case, the massive computing resources needed to train and run AI models. Coreweave has positioned itself as a key player, but skeptics are starting to wonder if the company can truly strike gold.
Kerrisdale Capital, a firm known for its critical research, has raised concerns about Coreweave’s long-term prospects. Their analysis suggests that Coreweave’s aggressive expansion, while securing market share, has come at the cost of significant discounts and squeezed profit margins. This strategy, necessary to compete with larger, more established players, might not be sustainable.
The core challenge lies in the rapid obsolescence of computing hardware, a consequence of Moore’s Law. Renting out computer power is a race against time, as newer, faster, and more efficient hardware constantly enters the market, devaluing existing infrastructure.
According to Kerrisdale Capital, even under optimistic scenarios, Coreweave may struggle to generate sufficient revenue to recoup its substantial upfront investments in data centers and deliver satisfactory returns to investors. This is further complicated by the company’s reliance on debt financing to fuel its expansion.
A potential slowdown in AI compute demand, accelerated hardware obsolescence, or a shift towards companies building their own data centers could spell serious trouble for Coreweave, especially given its debt burden. The fact that key insiders are reportedly selling their shares adds another layer of concern.
The market seems to be echoing these concerns. Coreweave’s valuation, currently around 10 times its current sales, reflects high expectations for future growth. However, the stock has taken a hit recently, declining by a quarter in the last month and more than 50% from its summer highs. This suggests that investors are becoming increasingly wary of the company’s prospects.
“With Coreweave currently valued at around 10 times current sales, investors’ expectations for its future success are extremely high.”
Coreweave’s situation highlights the inherent risks in the AI infrastructure space. While the potential is enormous, the path to profitability is far from guaranteed. Companies must navigate technological obsolescence, intense competition, and the ever-present threat of larger players entering the market.
The long-term success of companies like Coreweave will depend on their ability to innovate, adapt, and ultimately, demonstrate that they can generate sustainable profits in a rapidly evolving landscape. The future of AI infrastructure is still being written, and Coreweave’s story will be a key chapter in that narrative, potentially impacting other AI-related investments. For more insights from Dr Matthew Partridge, stay tuned.
