Is CoreWeave the Next Great AI Stock or the Next WeWork?

To say that CoreWeave (NASDAQ:CRWV) has had a brutal week would be an understatement. The stock fell by more than 20% last week alone to a new 52-week low, and it now sits about 55% below its recent high. The company's bonds were hit hard as well, and the market price of one issue due in 2031 briefly implied a yield of more than 16%, a level usually associated with financial distress.

Not surprisingly, some investors have started wondering whether CoreWeave is a viable long-term winner or if there are red flags that should prompt them to stay away. Will CoreWeave become one of the great AI stocks of the decade, or does it look too similar to companies that crashed and burned, such as WeWork, the once highly-regarded start-up that went from a $47 billion private valuation to bankruptcy in less than five years? I've seen several articles, videos, and social media posts comparing CoreWeave to WeWork, so I wanted to take a closer look.

Image source: Getty Images.

Full disclosure: I don't own CoreWeave, though it is on my watch list. Here's my take on the debt concerns and whether investors should be seriously worried.

Why investors are nervous

CoreWeave does have some parallels with companies whose investment thesis didn't exactly work out, such as WeWork. Like WeWork, CoreWeave is spending enormous sums on physical assets and funding much of that spending by taking on debt. As of the latest quarterly report, CoreWeave had about $35.6 billion in total debt, and its interest expense more than doubled year over year.

Although CoreWeave has an impressive backlog (more on that in a bit), the interest on its debt was about five times its adjusted operating income in the latest quarter.

Having said all that, CoreWeave isn't exactly WeWork, and for several key reasons. Most importantly, it is where the revenue is coming from, both now and in the future. WeWork relied on office leases that typically lasted about 15 years and rented space to members who could leave whenever they wanted.

CoreWeave's financial structure works in the opposite way. Customers sign long-term contracts for computing capacity, and much of their borrowing is tied to specific agreements. The company had a $104 billion backlog at the end of June and added more than $25 billion in commitments in the third quarter. And to double down on customer quality, Nvidia (NASDAQ:NVDA), which owns about 10% of CoreWeave, has even agreed to buy up to $6.3 billion in unsold capacity through 2032.

It's not WeWork, but there are some yellow flags

Although I don't believe CoreWeave is the next WeWork, it isn't exactly a low-risk investment. It depends on a handful of large customers for both current and future revenue, with Microsoft (NASDAQ:MSFT) alone accounting for about two-thirds of its revenue last year. The chips it buys lose value over time, so it needs to keep spending money to stay competitive.

CoreWeave also needs borrowing costs to remain attractive, and with some of its bonds yielding 15% on the secondary market, it would likely have to pay significantly more to take on new debt. In simple terms, the company's debt situation isn't a problem as long as customers follow through with their commitments, but borrowing to fund future growth could be a near-term challenge.

I'll be honest. CoreWeave (and the neocloud industry in general) is a business I truly want to love. I believe there will be more demand for AI compute in the years ahead, and that hyperscalers and others will increasingly need to secure the computing power they require without tying up hundreds of billions of their own capital in owned data centers.

CoreWeave is expected to report its third-quarter results in early November, and I'll be watching its backlog and revenue growth closely. If those numbers continue to move in the right direction, the debt load could become far more manageable. For now, I'm staying on the sidelines, but I'm certainly intrigued.

Matt Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.