After an 11% Drop, Is CoreWeave a Buy on the Dip or a Stock to Avoid?

CoreWeave (NASDAQ: CRWV) roared into the artificial intelligence (AI) forefront about a year ago when it launched an initial public offering -- and saw its stock price soar more than 300% in just a few months. Why such excitement about this company in particular? The tech player offers something in great need at this stage of the AI boom and something that should remain in demand: capacity to run AI workloads.

This business translated into soaring revenue -- and that's continued quarter after quarter. In the latest period, CoreWeave's revenue more than doubled to $2 billion.

Still, this wasn't enough to boost the stock. CoreWeave, which has dropped 33% from its peak last June, slipped 11% in the trading session following the earnings report. Is CoreWeave now a buy on the dip -- or a stock to avoid? Let's find out.

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Why CoreWeave stock has advanced and declined

So, first, let's consider why CoreWeave stock took off in its early months of trading and why it's experienced weakness in recent months. As mentioned, CoreWeave offers customers access to compute -- but not just any compute. CoreWeave specializes in serving AI customers with top graphics processing units (GPUs) for their workloads. This specialization sets it apart from cloud giants such as Amazon or Microsoft, which offer a wide array of AI and non-AI products and services.

Another plus is that customers may rent access to these GPUs by the hour -- so they can gain access for a very short period of time or for a long-term project. This offers them a great deal of flexibility.

Investors have appreciated the promise of this business model and CoreWeave's close relationship with Nvidia -- the chip giant owns shares of CoreWeave and has agreed to buy up any excess compute over the coming years. All of this helped lift CoreWeave stock last year.

The pace of AI spending

But in more recent times, as CoreWeave and other cloud companies invest billions of dollars to keep up with demand, investors have worried about this pace of spending. CoreWeave in particular has sparked concern because it's a highly leveraged player, relying heavily on debt for growth. That point has weighed on the performance of CoreWeave's stock and made investors particularly attentive to the company's outlook.

What may have disappointed investors in the latest report? CoreWeave's forecast for second-quarter revenue in the $2.45 billion to $2.6 billion range fell slightly short of analysts' expectations. Investors also may not have liked a forecast for higher capital spending this year due to rising component prices. CoreWeave increased the low end of its forecast to $31 billion from $30 billion.

Is CoreWeave a buy?

Now, let's return to our question: Is CoreWeave a buy on the dip, as some investors worry about its spending and reliance on debt? Or is it a risky stock that you should avoid? It's important to keep in mind that, in order to pursue its goal, CoreWeave must take the steps that it's taking right now -- this investment in infrastructure.

And several points suggest this is the right choice. CoreWeave's investments are being made to support demand that exists. For example, the latest quarter was CoreWeave's strongest ever for bookings, with backlog climbing to almost $100 billion. The company said this backlog represents contracts that either are active now or set to come online this year and into next year. The company also has greatly diversified its customer base, so it doesn't rely on just one or two customers for growth. Today, 10 customers have pledged to spend at least $1 billion on CoreWeave services.

As for CoreWeave's reliance on debt for growth, this surely makes the company a riskier bet than one of the highly profitable cloud leaders. But CoreWeave has prioritized caution as it proceeds along the investment path. And just recently, S&P raised the company's credit outlook to positive from stable.

All of this means CoreWeave could make a compelling buy right now -- but not for every investor. Cautious investors may be better off choosing a big cloud player like Amazon or Microsoft, as they have built massive, profitable businesses over time. The AI opportunity simply offers them an additional source of growth.

Aggressive investors, however, should consider CoreWeave, especially today on the dip. If the AI story unfolds as expected, this company, due to its strengths in AI compute -- an element that is crucial for AI to operate -- could deliver explosive growth down the road.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.