Why Shares of CoreWeave Are Soaring Today

Key Points

• CoreWeave equips its data centers with graphics processing units and rents time on them out to companies looking to run artificial intelligence applications.

• On Tuesday morning, CoreWeave announced a $14.2 billion deal to provide cloud computing capacity to Meta Platforms.

• As long as companies keep spending on AI infrastructure, CoreWeave should benefit.

• 10 stocks we like better than CoreWeave ›

Shares of cloud infrastructure player CoreWeave (NASDAQ: CRWV) were trading 15% higher as of 10:50 a.m. ET Tuesday. The stock price jump came after the company announced a new $14.2 billion deal with Meta Platforms.

Continuing to strike deals

In a regulatory filing Tuesday morning, CoreWeave announced that it had expanded its deal with Meta Platforms: It will provide cloud computing capacity to the social media giant through 2031 for $14.2 billion. Meta also has "the option to materially expand its commitment through 2032 for additional cloud computing capacity under the Order Form."

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CoreWeave builds and operates data centers equipped with the latest graphics processing units (GPUs) from Nvidia, and rents out capacity on its machines largely to companies that use it to power and train artificial intelligence (AI) applications. Many of the hyperscalers in the "Magnificent Seven" have high demand for this type of processing capacity. "The agreement underscores that behind every AI breakthrough are the partnerships that make it possible," a CoreWeave spokesperson told CNBC.

CoreWeave has had a good couple of weeks. It recently expanded its deal with OpenAI, the company behind ChatGPT, for an additional $6.5 billion. Meta CEO Mark Zuckerberg has previously vowed to spend hundreds of billions of dollars on new data centers to help power his company's AI ambitions.

Good as long as the party continues

As long as companies keep spending on AI infrastructure, CoreWeave is going to benefit. How long the party will continue is another question. CoreWeave is fast approaching a $70 billion market cap, but it is not yet profitable and trades at about 13 times forward expected sales. It also has a debt-to-equity ratio of more than 8.3, which is high.

All of this makes me a bit cautious on CoreWeave, despite the high-profile agreements it has signed recently. Due to the state of its balance sheet, its valuation, and the possibility of a slowdown in AI capital expenditures, I wouldn't recommend investing too much of your portfolio in the stock.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.