The auguries for the CoreWeave (CRWV) IPO on Nasdaq are not too bright. Nvidia is down 10% in the last two trading sessions, the grapevine on the Street suggests that the pricing on CRWV will be below the $47-$55 range. While revenue growth has been spectacular since 2022, margins, accounting and loan repayments are a red flag. If this IPO flops, the ripple effect will be a bite of the reality sandwich for Silicon Valley’s obscenely unrealistic, inflated private market valuation for AI assets.
Nvidia owns 6% of CoreWeave but that is not enough to ensure a successful floatation if the public market demand is deficient. A 27-$32 billion market cap for the CoreWeave IPO as its trading range would suggest seems pure fantasy. The greater fool theory works well until you run out of fools. I could never understand CRWV since it was an early stage crypto miner that later morphed into a AI cloud services business model. Its revenues in 2022 were a mere $16 million and magically rose to $2 billion by the end of 2024. This makes no real sense to me as Theranos was also magical when Elizabeth Holmes pitched its virtues to the grandees of the Valley.
The relationship with Nvidia is too incestuous for my taste as NVDA is a GPU supplier, investor, customer and technology partner. The client concentration risk in CRWV’s order book leaves simply no margin for error. A valuation of 13-16X revenues is also not consonant with Mr. Market’s ugly mood as the US economy braces for higher inflation and the 10-year Treasury note yield spikes to 4.38%. The IPO window can open tomorrow for CRWV and then snap shuts for hundreds of zombie unicorns, who are destined for Chapter 11 while CRWV can well lose 70% of its market value once it breaks syndicate.
Machiavelli warned his readers not to put their trust in the princes of Renaissance Florence five centuries ago. I ask my friends not to put their trust in the Mickey Mouse valuation models of Silicon Valley’s investment bankers and deal peddlers. CRWV also has $7.9 billion in outstanding loans at a time when borrowing costs could well spike higher due to inflation risk. This is just not a good omen for CRWV’s post IPO share price performance.
Its $324 million operating profit is lower than its $361 million interest expense taken out with friendly loan sharks at the modest rate of 12%. This is the IPO equivalent of trying to pole vault over the Golden Gate Bridge in San Fran and hoping for a happy ending upon landing. This business model is too capital intensive for CRWV to slash the scary scale of its borrowing. If the IPO flops, CRWV will be forced to restructure its loans in 2026 and this will gut shareholder value.
I simply cannot fathom how this puppy can maintain its 2024 capex rate in the next 2-years to justify its loony-tune valuation. To me, this is kryptonite and I dread this AI monster with a $8 billion negative cash flow yield in 2024. Pass!
Also published on Medium.
