Nvidia Guarantees CoreWeave Capacity -- A Sign of Strength or Overreach?

Key Points

• Nvidia will buy CoreWeave's excess capacity through 2032.

• CoreWeave stock jumped 8% on the news.

• The alliance should help drive further AI growth, benefiting both companies.

• 10 stocks we like better than CoreWeave ›

CoreWeave (NASDAQ: CRWV) has been one of the most unpredictable stocks on the market this year. The AI cloud infrastructure stock debuted in late March, but its IPO was undersubscribed. It was forced to lower its offering price, and Nvidia (NASDAQ: NVDA) made a significant stock purchase, helping the company go public. In the weeks that followed the IPO, CoreWeave stock traded sideways, but it then started to climb in May, surging to a peak of $187 in June, nearly five times its IPO price of $40. Since then, it fell by more than 50% before recovering some of those losses.

The company's business model, setting up data centers and buying Nvidia GPUs so its customers can run intense AI workloads, is essentially brand new. Nebius Group is the only other company doing something similar, and it's still much smaller than CoreWeave.

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CoreWeave has already topped $1 billion in quarterly revenue, and it's growing exceptionally fast, with revenue up 206% in the second quarter. However, the company is deeply unprofitable in large part due to the high interest expense it has from the debt it's taken on to fund its data center buildouts.

That's why investors cheered on Monday when CoreWeave signed a $6.3 billion capacity order with Nvidia, as CoreWeave stock jumped 8% on Monday after the company reported the deal.

Image source: Getty Images.

What's happening between CoreWeave and Nvidia

In a filing, CoreWeave said that it and Nvidia entered into a new order form with an initial value of $6.3 billion, giving Nvidia access to residual unsold capacity. According to the deal, Nvidia is obligated to purchase residual unsold capacity through April 2032.

The deal strengthens the already tight relationship between the two companies. Nvidia is a major shareholder in CoreWeave, finishing the second quarter with 24.3 million shares, which is worth around $3 billion today.

That's not the only reason for Nvidia to agree to purchase up to $6.3 billion of excess capacity. CoreWeave also spends much of its capital expenditures on Nvidia hardware, and it is spending heavily on capex, with $3.9 billion on the books for the first half of the year.

Additionally, CoreWeave gets early access to Nvidia components. In the second quarter, it became the first company to offer the complete Blackwell GPU portfolio at scale.

A win-win for Nvidia and CoreWeave

Overall, the deal looks like a smart move for both companies. It's more important for CoreWeave as it acts as a vote of confidence and provides an outlet for any excess capacity it might have. Additionally, it's in the company's interest to maintain a close relationship with Nvidia as its backing adds substantial value to the company and reassures investors.

For Nvidia, ensuring CoreWeave's success should only benefit it in the long run. The emerging AI cloud infrastructure business can help drive the larger growth in the AI industry by allowing hyperscalers, start-ups, and other customers of CoreWeave and Nebius, which Nvidia also owns shares in, to easily scale up AI applications and workloads.

Nvidia needs demand for its GPUs and AI components to continue to grow, and supporting a broader AI ecosystem that can help accomplish this is a clever way of doing it.

For Nvidia, the best way to look at the CoreWeave deal isn't as a sign of strength or even potential overreach. It's a smart strategic move that will strengthen a key partnership, give it access to AI cloud capacity, and give CoreWeave and AI capacity more generally a boost.

Thus far, Nvidia's investment in CoreWeave has paid off handsomely, and the AI chip leader is likely to do what it can to ensure that continues.

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Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Nebius Group. The Motley Fool has a disclosure policy.