This Nvidia-Backed Artificial Intelligence (AI) Unicorn Is About to Go Public. Here Are 2 Reasons I Won't Be Investing.

This Nvidia-Backed Artificial Intelligence (AI) Unicorn Is About to Go Public. Here Are 2 Reasons I Won't Be Investing.

  • 23.03.2025 14:11
  • msn.com
  • Keywords: AI, Growth, Market

Nvidia-backed AI startup CoreWeave's IPO is risky due to high customer concentration and debt, while AI stocks like Nvidia and Palantir face short-term declines but show long-term growth potential despite market challenges.

Microsoft NewsNvidia NewsNVDAsentiment_satisfied
open_in_newOriginal article

Estimated market influence

Nvidia

Nvidia

Positivesentiment_satisfied
Analyst rating: Strong buy

Nvidia is a major player in AI chips and has supported CoreWeave, which is going public. Their stock has declined recently but they are expected to recover due to strong AI demand.

CoreWeave

Negativesentiment_dissatisfied
Analyst rating: N/A

Despite high valuation and rapid growth, CoreWeave faces customer concentration risks and significant debt, making it a risky investment.

Context

Analysis of CoreWeave's IPO and Market Implications

Key Facts from CoreWeave's S-1 Filing

  • Valuation: Expected at approximately $24 billion.
  • Revenue Growth:
    • 2022: $15.8 million
    • 2023: $228.9 million (1,349% YoY growth)
    • 2024: $1.9 billion (737% YoY growth)
  • Customer Concentration:
    • 41% and 73% of revenue in 2022 and 2023 respectively from three customers.
    • 77% of 2024 revenue from two customers.
    • Microsoft accounted for 62% of 2024 revenue.

Financial Concerns

  • Operating Expenses:
    • 2022: $38.7 million
    • 2023: $243.4 million (513% YoY growth)
    • 2024: $1.59 billion (583% YoY growth)
  • Stock-Based Compensation:
    • 2022: $1.5 million
    • 2023: $15.1 million
    • 2024: $31.5 million
  • Debt:
    • End of 2023: $1.5 billion
    • End of 2024: $7.9 billion
    • Principal payments between 2025-2029: $8.0 billion, with $5.6 billion due in the next two years.
  • Net Loss:
    • 2022: ($31.0 million)
    • 2023: ($593.7 million)
    • 2024: ($863.4 million)

Market and Industry Implications

AI Stocks in the Broader Market Context

  • Market Performance:
    • Nasdaq advanced by over 43% in 2023.
    • Recent declines due to economic uncertainty and potential inflationary pressures from Trump's policies.
  • AI Growth Projections:
    • Expected CAGR of ~35% through 2030, reaching over $1 trillion.
  • Major Players' Investments:
    • Meta Platforms: Up to $65 billion in spending for AI programs.
    • Alphabet: $75 billion in capital expenditures, much of which is for servers and data centers.
  • Government Support:
    • Trump administration supports OpenAI's Stargate project, aiming to build AI infrastructure in the U.S. over four years.

Strategic Considerations

  • Jensen Huang's Outlook:
    • Nvidia expects $1 trillion in global data center investments.
    • Demand for Blackwell chips exceeded supply post-launch, indicating sustained growth.
  • Investment Strategy:
    • Current market decline presents opportunities to buy undervalued AI stocks.
    • Nvidia trading at ~26x forward earnings (lowest in a year), offering potential long-term gains.

Competitive Dynamics

  • Nvidia's Dominance: As the leading AI chipmaker, Nvidia is well-positioned to benefit from increased AI adoption and infrastructure spending.
  • Palantir and SoundHound AI: Both have seen significant declines but are expected to recover as part of the broader AI growth narrative.

Long-Term Effects and Regulatory Impacts

  • Regulatory Environment: Potential risks from Trump's policies on inflation and corporate earnings, but ongoing government support for AI development could mitigate some concerns.
  • Liquidity Concerns: CoreWeave's high debt levels and cash burn raise questions about its long-term viability without significant changes in revenue or expense management.

Conclusion

While the broader AI sector shows strong growth potential, CoreWeave's IPO presents significant risks due to customer concentration and financial strain. Investors should consider the broader market trends and company-specific fundamentals before committing to AI stocks like CoreWeave.