Is CoreWeave Stock in Trouble?

CoreWeave (NASDAQ: CRWV) rents out computing power for companies, giving them access to the latest chips from Nvidia. Thus, it indirectly becomes a proxy for investing in artificial intelligence (AI). If the market is bullish on AI-related growth, that can be a great catalyst for CoreWeave's stock, as it can benefit from that excitement.

But lately, there doesn't appear to be as much excitement as there has been in the past. In just the past month, the stock price has declined by more than 40%. And last week, it closed at a price of $71.65 -- nowhere near its 52-week high of $187.00. Investors appear to be more concerned about AI spending these days. Does that spell trouble for CoreWeave, and could the stock be heading even lower?

Image source: Getty Images.

Is it all just a big misunderstanding?

A big concern for many investors is the high debt load that CoreWeave carries on its books. Debt isn't good because it can saddle a company with high interest costs and weigh down its overall earnings. And with CoreWeave, its debt is considerable. As of the end of September, the company's current and non-current debt totaled approximately $14 billion, nearly three times its current assets of $4.7 billion.

The exclamation mark on it all is the $310.6 million the company generated in interest expense for the quarter, which was about six times its operating profit of $51.9 million. Interest expenses are wiping out its profits.

Management, however, says that while the debt is high, it isn't necessarily a bad thing for the business. In a recent interview with Barron's, CoreWeave Chief Development Officer Brannin McBee said that "People will look at our debt load and say, wow, that's a lot of debt. But in reality, when we are entering capex, it's all success-based capex. We're not buying infrastructure and hoping that people come and use it."

The company acquires new infrastructure as it enters into new contracts with consumers, and thus, the debt is related to new business. Management says it's justifiable and not worrisome, but investors are having a difficult time looking past the high debt load plus the lack of overall profitability.

CoreWeave's growth has been declining, but it's still incredibly impressive

As long as AI growth looks strong, a compelling case can be made for investing in CoreWeave. In the company's most recent quarter (ended Sept. 30), its revenue totaled $1.4 billion, which was more than double the $583.9 million it posted in the same period a year ago. And over the past three quarters, its revenue has tripled.

The strong growth has enabled CoreWeave to remain at a fairly modest valuation with respect to revenue. Currently, it trades at a price-to-sales (P/S) multiple of around 8x, which isn't all that high for such a fast-growing business. But at the same time, the company isn't generating any profit yet, which could make its $35 billion market cap difficult to justify, even for growth investors.

Why I'd avoid CoreWeave's stock

CoreWeave's business benefits from a lot of AI-powered growth, but if that dries up, its recent decline may pale in comparison with the more epic sell-off that may be waiting around the corner. Investors are growing concerned about an AI bubble and rightfully so. Some businesses are saying they are not seeing a payoff from their AI investments, and it may only be a matter of time before that begins to impact AI spending from hyperscalers.

With so much dependence on hyperscalers and continually high AI spending, I'd be concerned that CoreWeave may be among the most vulnerable AI stocks to be holding right now. Its business isn't profitable at a time when AI spending is high, which calls into question just how strong its business model really is and whether it even has a path to profitability. For those reasons, I'd steer clear of the stock, as it's full of risk.

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.