Should You Buy the Dip on CoreWeave's Stock?

CoreWeave (NASDAQ: CRWV) is an interesting company. It is constantly announcing new deals and growing its artificial intelligence (AI)-focused cloud computing operations at a triple-digit pace, yet the stock is currently trading down 60% from its all-time high. Those facts may seem like a mismatch, which has some investors considering a buy-on-the-dip case for CoreWeave stock.

Should you be one of them? Or are there better options out there? Let's take a look.

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CoreWeave is a new play on an old business model

CoreWeave isn't trying to reinvent the wheel, just adjust it. It uses the established cloud computing business model but adapts it to be artificial intelligence (AI)-first. To do this, it's building out data center space to rent and filling the space with cutting-edge computing units from Nvidia. This gives its clients access to the latest and greatest computing units, making them a popular choice to run AI workloads on.

The primary issue some investors have with CoreWeave at the moment has to do with the company's spending. CoreWeave has been operating at a loss and spending every penny it has on building out its footprint so that it can eventually make money from the servers it's installing.

While the cloud computing titans it competes against deployed the same strategy when they were building out their infrastructure, they had other lucrative business units generating all the cash they needed to fund the expansion. CoreWeave doesn't have that and relies more on external funding.

Because CoreWeave is focusing on cutting-edge AI technologies to attract clients, it must keep up with the latest product launches from Nvidia. Nvidia's product release timeline is on a yearly cycle, so all the computing equipment CoreWeave installed over the past year will be obsolete in the eyes of some clients this year.

Another cost to factor in is that graphics processing units (GPUs) have a tendency to burn out in one to three years if exposed to continuous hard usage. This makes the capital input cycle intensive, and CoreWeave is still working to find the right pricing structure needed to pay for everything and establish itself as a long-term viable company once AI hype has died down.

CoreWeave's growth is impressive

That's the bear case for CoreWeave's efforts; the bull case revolves around its projected growth. While CoreWeave may be burning cash now, it's being done for a good purpose. The infrastructure it already has in place helped Q4 revenue rise 110% year over year to $1.6 billion. Its revenue backlog now sits at nearly $70 billion, up 342% year over year.

Demand for CoreWeave's capabilities is rapidly expanding, and 42% of that backlog is expected to be converted to revenue in the next two years. That's monster growth, and if it can convert, it could establish itself as a viable player in the cloud computing industry.

The big unknown is how large its capital expenditures will be on an annual basis. If expenditures stay below operating profits, CoreWeave could be a viable long-term business. If they aren't, CoreWeave's business model will be proven a failure. The market is still unsure about CoreWeave, and that's why the share price has fallen so much.

I'm still unsure about CoreWeave's viability. If I were to invest in it, I'd keep the position fairly small to account for that risk factor.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.