Why CoreWeave's Struggles Could Weigh Down Nvidia's Stock

CoreWeave (NASDAQ:CRWV)'s stock crashed last week amid concerns of rising interest rates and its high debt load. CoreWeave has a close relationship with tech giant Nvidia (NASDAQ:NVDA) and is a big customer of theirs. Not only that, but Nvidia has also invested billions into CoreWeave, and thus, it has a lot at stake in how the neocloud company does.

Both stocks have been struggling of late, although Nvidia's decline has been much more modest in comparison; it has declined by around 2% over the past month, while CoreWeave's stock is down well over 20%.

However, things could get worse for Nvidia as concerns related to CoreWeave may cause investors to question how sustainable Nvidia's long-term growth really is, particularly if companies have to scale back investments in artificial intelligence (AI) due to rising interest rates.

Image source: Getty Images.

Nvidia's stock looks cheap, but that's based on future expectations

It may be odd to think that the most highly valued stock on the U.S. markets, Nvidia, is a cheap buy. It has a market cap of around $5.2 trillion, but many growth investors still believe it's a cheap stock to own due to its earnings expectations. Nvidia is trading at a forward price-to-earnings multiple of 25, which is based on how profitable analysts expect the business to be over the coming year.

And when looking at the price-to-earnings-growth multiple, or PEG, then it looks like a downright steal at approximately 0.48. The cutoff for a cheap stock based on PEG, which factors in a company's expected growth over the next five years, is 1.0 -- Nvidia is well below that.

The problem is if anything shakes the confidence in Nvidia's future growth. CoreWeave's problems could be symbolic of that. It's a key customer that also rents out compute power to other businesses. If it runs into problems because of its high debt load and interest costs, investors may become even more concerned about the growth prospects of smaller, riskier businesses that don't have the close relationship with Nvidia that CoreWeave benefits from.

Investors should tread carefully with Nvidia

Nvidia has a terrific business, and it's benefited from considerable investments in AI in recent years. But at the same time, more tech companies are making their own chips and looking to other chipmakers in an effort to cut costs and be less dependent on Nvidia. And rising interest rates may lead to some companies pulling back on capital expenditures.

When investors are basing their investment decisions on expected future growth, that can be a risky proposition, because if that rosy outlook doesn't pan out, the stock could be due for a steep correction. While Nvidia may be a good long-term investment, investors should brace for possible adversity in the near term.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.