CoreWeave's (CRWV) stock just can’t get out of headlines.
Shares of Nvidia (NVDA)-backed cloud-computing company fell almost 10% on Wednesday, and CRWV stock touched a fresh 52-week low of $40.58 just days before its Q3 earnings release.
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The reason for this selloff may be linked to investors repricing the company’s political and regulatory risk following the midterm elections.
The decisive blow came from Texas, where Democrat Gina Hinojosa defeated Governor Greg Abbott and has called for a statewide moratorium on new AI data center construction. Texas accounts for roughly a quarter of planned U.S. data center capacity, making CoreWeave particularly exposed.
Why CoreWeave’s Stock Keeps Sliding
The drop on Wednesday is only the latest chapter. CRWV is down about 53% over the past year and 35% so far year-to-date (YTD).
To put that in perspective, the stock has risen to the latest price from a 52-week low, indicating it is approximately 65% below the higher point. From the initial hype over customer demand for AI to concerns about debt, higher interest rates, and data center restrictions, the excitement has turned to apprehension. Short selling has also been ramped up.
The figures are part of the reason for anxiety. In the previous quarter, net loss rose to $626 million from $290 million a year earlier, and interest expense increased to $640 million.
Then, free cash flow turned negative by a margin of $5.7 billion due to CoreWeave's spending on capital projects of $9.35 billion. Because of this, the company was left with just $5.5 billion in cash at the end of June. Operating income, meanwhile, was adjusted to $128 million compared to $200 million, which led to a smaller margin of 5% versus 16%.
www.barchart.com What the Texas Headline Means
The newest trigger was political. Democrats won a number of important governor races, most notably in Texas, with Gina Hinojosa beating incumbent Greg Abbott.
Hinojosa campaigned on a moratorium on new data center approvals until legislation is passed to set new rules, and that's significant as CoreWeave has inked capacity at Galaxy Digital's Helios campus in West Texas. It would be the compute aspect of permitting that may lose out if it slows.
The change shouldn't impact current customer pledges, CoreWeave says. As that's not what investors are buying!
Its 2031 bonds, which fell into distressed territory at times, are trading around 79.5 cents on the dollar, and credit default swaps hit a record.
The actual concern is funding, therefore. If a company is heavily leveraged to build, they have to minimize the time period between the start of the project and its completion, since that time will represent income they are losing and cash that they are losing in interest payments.
Growing Beyond GPUs
Beyond Texas, the business keeps expanding. Backlog sits at $104 billion, and CoreWeave added more than $25 billion in new commitments early in the third quarter.
Moreover, managed inference annual recurring revenue jumped from $1 million to over $100 million, while services beyond GPUs, such as storage, CPU, networking, and software, now exceed $400 million in annual recurring revenue.
Looking ahead, Management guided third-quarter revenue to $3.45 billion to $3.6 billion, with adjusted operating income of $200 million to $260 million. The next earnings report, due Nov. 10, could move the stock sharply in either direction.
CRWV’s Valuation Isn’t Cheap Yet
After a crash like this, you’d expect a bargain. That’s not the case yet.
For example, CRWV's forward price-to-cash flow (P/CF) ratio is 3.48, meaning the stock is much cheaper than the sector median of 17.57. However, price-to-book (P/B) at 5.99 is notably higher than the sector’s 4.12, and the EV/Sales ratio at 9.24 is much higher than the sector median of 3.3x.
That said, the stock is cheaper than it was. It’s just still pricey for a company that loses money and carries this much debt.
Wall Street Opinion on CRWV Stock
Analysts have been showing growing concerns about CRWV stock. Recently, Citi’s Tyler Radke kept a “Buy” rating but cut his price target to $128 from $159, citing a “continued insatiable demand backdrop.” Moreover, UBS also stayed at “Buy” and trimmed its target to $105 from $120.
Others are more cautious. Raymond James lowered its “Buy” target to $75 from $125, and Morgan Stanley moved to “Hold” with a $70 target, down from $99.
Despite the negative remarks, the consensus is still standing at “Moderete Buy” with a mean price target of $126.40, implying roughly 158% upside from recent prices.
It seems enormous on paper, but that's probably because analysts are concerned about the balance sheet, dilution, and financing costs when aiming at the target. So, as it stands at the moment, it's only for investors who take risks and believe demand for AI compute is going to remain steady for what can be years in the future.
www.barchart.com On the date of publication, Nauman Khan did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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