Nvidia-Backed AI Start-Up Sets IPO Stage: Is It a Good Investment?

The world of initial public offerings (IPOs) has been quite chilly since 2021. In the previous two years, a significant number of companies rushed to enter public markets, especially through special purpose acquisition companies (SPACs). Unfortunately, many of these companies were poorly managed, and some were even involved in fraudulent activities. As a result, there has been a noticeable decrease in new stock listings, with many start-ups choosing to stay private.

However, the rise of artificial intelligence (AI) might be shaking up the IPO market. Recently, AI cloud start-up CoreWeave submitted its financial documents as part of the preparation for an IPO. This could potentially be the first generative AI stock to reach public markets. CoreWeave is backed by Nvidia, making it a company worth keeping an eye on.

In this analysis, we will delve deeper into CoreWeave’s operations and explore whether purchasing shares in this IPO might be a wise decision.

Explosive Growth Driven by AI

CoreWeave began its journey primarily as a cryptocurrency mining operation. Mining cryptocurrencies demands significant computing power, which led the company to amass a large number of graphics processing units (GPUs) from Nvidia. However, a fortunate pivot occurred when the cryptocurrency market began to decline in late 2022. During this time, the popularity of generative AI, especially tools like Chat GPT, surged, prompting CoreWeave to switch its focus from cryptocurrency mining to becoming an AI cloud provider, leveraging its Nvidia GPUs. Notably, Nvidia invested $100 million in CoreWeave in 2023.

Current generative AI tools, as they stand, require immense computing capacity to train and operate effectively. This growing need for cloud computing resources has prompted major technology companies to plan on spending hundreds of billions on capital expenditures as they aim for growth by 2025. The demand for cloud services has skyrocketed, with customers eager to engage these hyperscale cloud providers.

Positioning itself as an AI-centric cloud hyperscaler, CoreWeave is attempting to take on established names like Amazon Web Services, Microsoft Azure, and Google Cloud. So far, this strategic focus appears to be succeeding. The company's revenue jumped from just $15.8 million in 2022 to an astounding $1.9 billion in 2024, marking it as one of the fastest-growing firms globally. Impressively, it has already turned profitable, reporting $324 million in operating income last year, just a few years after its business model shift.

Evaluating the Demand

CoreWeave aims to raise billions through this IPO as it offers shares to the public. It has applied to list its Class A common stock, trading under the symbol CRWV on the Nasdaq Stock Market.

However, the company requires this capital because scaling a cloud computing business is expensive and demands substantial initial investment. In 2024, CoreWeave spent approximately $8.7 billion on capital expenditures, resulting in a negative $6 billion in free cash flow. To manage these expenses, the company has accumulated $7.9 billion in debt.

In its S-1 filing with the Securities and Exchange Commission (SEC), CoreWeave’s management stated they have $15.1 billion in performance obligations from current customers to be fulfilled over the following years. While this financial commitment looks promising and should support future revenue growth, it does not ensure it will materialize.

Presently, a significant portion of CoreWeave's revenue is concentrated, with 62% of it coming from Microsoft alone in 2024. Since Microsoft also operates its cloud services, it could potentially reduce its spending with CoreWeave by shifting operations in-house if growth diminishes. There is also the looming possibility of a slowdown in AI investments, which could pose challenges for CoreWeave's business model as it has heavily invested to prepare for increased AI demand.

Should You Consider Buying CoreWeave's IPO?

Unless the current market downturn continues for an extended period, it is likely that CoreWeave will launch with a premium valuation. Excitement surrounding this IPO is expected, given its status as the first generative AI-focused stock to go public; it is conceivable that the stock may experience a significant rise on its first trading day.

However, this enthusiasm does not necessarily mean it is wise to buy the IPO. CoreWeave may enter the market with a high valuation while burdened by substantial debt and a yearly cash flow deficit of $6 billion. This situation is less than ideal. Moreover, with more than half of its revenue reliant on one client (Microsoft), who is also a direct competitor, the risks are considerable. Such a nascent enterprise carries many uncertainties that could negatively impact the stock in the coming years. Therefore, seasoned investors may want to monitor developments before jumping into this trend.

In general, it's prudent to be cautious with IPO stocks, and CoreWeave is no exception. Historically, many IPOs tend to lag behind the market during their first year due to restrictions on selling by insiders and investors. Such a pattern might also unfold for CoreWeave. Even if the company seems promising, it is advisable to keep it on your watchlist for now.

IPO, investment, AI