Here's Why CoreWeave Stock Tanked This Week
Key Points
CoreWeave is spending heavily to increase available capacity.
Reports say that CoreWeave is exploring a way to hedge its bets.
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It wasn't a great week for tech stocks, but CoreWeave (NASDAQ: CRWV) severely underperformed the tech-heavy Nasdaq Composite index. Shares of the artificial intelligence (AI) infrastructure provider plunged 18% for the week, according to data provided by S&P Global Market Intelligence.
Volatility is common in stocks like CoreWeave, which are in heavy growth mode. Revenue is soaring, but the company is still losing money. But a report this week may have spooked investors, too.
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CoreWeave leases GPU computing power for the development and execution of AI models. It has been spending heavily to grow the volume of compute capacity it has available. That spending has included long-term supply agreements with chip manufacturers.
Demand is so high, though, that memory chip prices have gone through the roof. That's why investors have sent the stocks of names like Micron Technology and Sandisk soaring this year. The memory sector has historically been cyclical. As suppliers increase capacity while demand is high, a supply glut could follow, sharply dropping prices.
That's why CoreWeave may be looking to hedge against a future drop in memory chip prices, according to reports. The company's supply contracts could leave it exposed if competitors can pay lower prices after a downturn in the memory market.
The possibilities considered include put options -- which are contracts granting the owner the right, though not the obligation, to sell an underlying asset at a specified price in the future -- and possibly other derivative instruments.
Owning CoreWeave stock means accepting the volatility that inevitably comes with it. But investors typically don't like companies straying from their core competencies. That may help explain the outsize drop in CoreWeave stock this week.
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Howard Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.
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