CoreWeave's IPO: A Critical Benchmark for Public Markets and the AI Revolution

A fast-growing AI cloud firm called CoreWeave is anticipated to set prices for its initial public offering sometime this evening. Trading of its shares on the Nasdaq will commence tomorrow morning with the ticker symbol provided. CRWV .

The firm revealed last week that the anticipated share price could fall between $47 and $55, potentially valuing CoreWeave at $27 billion to $32 billion when trading publicly.

The initial public offering price might vary based on how much investors want to buy into it.

CoreWeave is an exclusive focus on AI , with its entire revenue stemming from renting out AI server clouds equipped with Nvidia processors.

The initial public offering (IPO) and subsequent trading of the stock will serve as a two-part examination: It will assess the excitement around the artificial intelligence sector, which drove the market in 2023 and 2024 yet lost momentum in 2025. Additionally, start-ups and investment banks will closely monitor this event as an indicator of how robust the IPO market remains after experiencing weakness starting from 2022.

Founded in 2017 as a cryptocurrency mining operation, CoreWeave shifted focus towards offering AI cloud services following the 2018 collapse of the crypto market. The timing proved fortuitous when ChatGPT gained popularity toward the end of 2022. Prior to the surge in AI investments, the firm reported revenues of $16 million in 2022. By the close of 2024, their sales had skyrocketed to $1.9 billion—a remarkable year-over-year increase of 737%. Considering this rapid expansion, examining the final quarter might provide even better insight, indicating an approximate annualized run rate of around $3 billion.

The fast-growing company It has already become profitable from an operational standpoint, achieving a 17% operating margin in 2024. If we exclude the advantage provided by significant client deposits, it generated $700 million in operational cash flow for the same year, reflecting a 37% margin.

CoreWeave has thrived due to its strong connection with Nvidia, acting not only as an investor but also as a key supplier and client. This partnership allowed CoreWeave to obtain cutting-edge technology from Nvidia during the rollout periods of 2023 and 2024.

However, CoreWeave encounters significant risks. Its top two clients, Microsoft and presumably Nvidia, accounted for 77% of its projected 2024 revenues, with Microsoft contributing the bulk at 62%. While Nvidia utilizes CoreWeave for certain artificial intelligence tasks internally, for Microsoft, this represents excess capacity they sell through their Azure cloud division to end-users.

In March, CoreWeave secured its third major client when OpenAI signed a contract potentially worth up to "$11.6 billion." However, both parties have not disclosed the duration of this agreement. Excluding this particular deal, CoreWeave had an order backlog totaling $15 billion as of December 2024, out of which $8 billion was scheduled to be fulfilled in 2025 and 2026.

However, the fragility of the business model extends further than just this risk associated with concentrated customers.

During CoreWeave’s presentation to prospective IPO investors, CFO Nitin Agrawal highlighted the company’s "unwavering dedication to funding," as their operations rest upon a significant pile of debt that must continue growing. By the close of 2024, CoreWeave had credit facilities totaling over $12 billion, with approximately $7.9 billion borrowed. Despite having newer debts at considerably reduced interest rates, the overall weighted average interest rate stood around 12%.

The debt with high-interest rates amounts to $361 million in interest expenses for the year 2024, which surpasses its $324 million operating profit.

Due to its capital-intensive business approach, the firm’s debt is expected to increase further. At the close of last year, they still had $4.4 billion available for drawing on current credit facilities and held an additional $1.4 billion in cash reserves.

The initial public offering is anticipated to generate between $2.3 billion and $2.7 billion in fresh capital; however, this figure may shift if the IPO pricing changes. Additionally, CoreWeave is set to get $350 million from OpenAI as part of an equity swap agreement.

CoreWeave might benefit from additional liquidity, particularly since approximately $5.6 billion in debt needs to be settled in 2025 and 2026. The company plans to utilize part of the funds raised through the initial public offering to start this repayment process, including paying down a 12% interest loan amounting to about $1 billion that matures by year-end. Moving ahead, an important indicator for CoreWeave will be its mean borrowing cost because substantial payment obligations have the potential to erode profits similar to what was observed in 2024.

Apart from debt repayments, CoreWeave must also manage $1.1 billion in lease payments between 2025 and 2026, with this figure expected to increase.

However, the more significant challenge lies in the future capital expenditures required to maintain this momentum. In 2024, CapEx amounted to $8.7 billion, marking an increase of 196% compared to the previous year, and it must continue to rise rapidly to sustain the operations implied by its valuation. Due to these substantial capital expenditures, CoreWeave experienced a free cash flow deficit of $8 billion in 2024, not accounting for customer deposits.

Over the medium and long term, a positive outlook hinges on the expectation that the demand for AI cloud computing will surpass the available supply. This scenario provides ample room for a company like CoreWeave, even acting merely as an additional resource when needed. Essentially, this mirrors the argument presented extensively by NVIDIA CEO Jensen Huang during his recent keynote address at the GTC conference. As such, investing in CoreWeave could be seen as benefiting from NVIDIA's success indirectly.

However, if demand growth rates decrease and fall below supply growth, the CoreWeave flywheel might come to a halt. This poses a genuine threat, particularly if major tech companies, which are investing hundreds of billions into AI data centers, decide to reduce these expenditures in the short term.

In such a situation, CoreWeave's substantial depreciation and interest costs would place increased pressure on their financial performance report. If Microsoft were to cease requiring the additional processing power provided by CoreWeave, this could swiftly eliminate CoreWeave’s operational profitability.

CoreWeave’s leadership team has attempted to reduce these risks through an innovative cloud business strategy. They enter into "take-or-pay" agreements which obligate clients to incur penalties should they fail to utilize the agreed-upon resources. These contractual obligations span between two and five years, typically beginning with an initial payment equivalent to 15% to 25% of the total contract amount. By the close of 2024, CoreWeave reported having $4.1 billion in client deposits listed on their financial statements, with $769 million slated for recognition as income in 2025.

Once the contract is signed, CoreWeave begins building the necessary infrastructure for the client, which typically takes around three months. Although this approach minimizes the risk of excess capacity in the near term, the wait could potentially deter some customers from signing up.

Investors ought to be aware of certain aspects regarding CoreWeave’s capital framework as well. The Class A shares, intended for public trading, come with one voting right each. In contrast, a more limited set of non-publicly traded Class B shares possess ten voting rights per share. Consequently, this arrangement grantsClass B stakeholders controlling authority over the majority of votes.

The stock might experience early volatility as well: just 9% of the fully diluted shares will be up for trading.

In essence, CoreWeave presents a high-risk, high-reward opportunity for investors with a long-term horizon. Should the demand for AI computing persist beyond current availability, the company’s stock might perform exceptionally well initially. However, should investment in AI decline, CoreWeave’s share price may suffer significantly as a consequence.

Send your message to Adam Levine at adam.levine@barrons.com