CoreWeave stock climbed to $91.90 on Tuesday, tracking gains across other neocloud companies such as IREN and Nebius. The shares are now up more than 50% from their lowest level this year. Still, despite this strong rally, the company faces substantial risks ahead.
CoreWeave stock jumps as AI companies rally
The ongoing CRWV stock rebound is happening as companies in the artificial intelligence (AI) industry soar. Nvidia, the biggest company in the world, jumped and is now approaching the $6 trillion market capitalization level. AMD jumped by 3.6%, while Dell and Broadcom are up.
CoreWeave is a big player in the AI space, where it offers computing solutions to the biggest AI companies in the world, like Anthropic, OpenAI, and Microsoft.
It has become the biggest player in the neocloud industry, with its revenue backlog rising to over $104 billion. Its biggest deals include a $35 billion partnership with Meta, $22 billion one with OpenAI, and a $6 billion one with Jane Street.
The most recent financial results showed that CoreWeave’s business continued soaring, with its quarterly revenue rising by 112% to $2.6 billion. This revenue is expected to grow in the foreseeable future. Yahoo Finance data shows that analysts estimate that its annual revenue will hit $12.87 billion this year, up by 150% from a year earlier. It is then expected to more than double to $26.7 billion next year.
CRWV stock faces substantial risks
Despite the optimism, CoreWeave faces some major risks, which explains why the stock is still in a bear market. One of the risks is that its capital expenditure continues rising. It plans to spend between $35 billion and $39 billion this year. It has already spent over $29.2 billion in the last five quarters.
Capital expenditure will likely continue growing as the cost of key equipment like servers, GPUs, CPUs, and storage. This, in turn, will push the company to raise more money through debt and equity over time.
Additionally, there are concerns about depreciation, which is significant. In the last earnings report, the company said that its depreciation and amortization jumped to over $1.3 billion, up from $560 million in the same period last year. Its D&A figure accounted for over 52% of its total revenue.
CoreWeave’s challenge is that it will need to keep spending on GPUs as new models come online. Michael Burry believes that these GPUs have a 2- to 3-year useful life stretch, while CoreWeave assumes over 5. This view explains why its bond yields are rising. Those with maturities of 2032 are yielding 11.3%. Just recently, it raised $1.1 billion through a junk bond offering.
CoreWeave stock is also facing the challenge of rising competition. Nscale, a British company, has seen its backlog jump to over $104 billion, while Lambda is raising $4 billion at a $14.5 billion valuation. Most Bitcoin mining companies like Riot Platforms and MARA Holdings, have all diversified into the AI data center industry.
CoreWeave shares have formed a head-and-shoulders pattern
The daily chart shows that CoreWeave stock has moved sideways in the past few days. A closer look, however, shows that it has formed a head-and-shoulders pattern whose neckline is at $66.55. H&S is one of the riskiest patterns in technical analysis.
The stock has continued to consolidate along the 50-day and 100-day Exponential Moving Averages (EMA). The most likely scenario is where the stock remains under pressure and retests the support level of $66.55. A break below that level will point to more downside.