CoreWeave’s (CRWV) Friday debut was the most hyped U.S. tech IPO in years, seen by Wall Street as a litmus test for both the IPO market and the AI trade.
Not to mention the fact that the IPO was backed by Nvidia (NVDA).
CoreWeave rents out Nvidia’s graphics processing units (GPUs) to tech giants like IBM, Meta and Microsoft, the latter of which accounted for 62% of the company’s $1.92 billion in revenue last year.
The IPO ended up being relatively muted, starting with the fact that CoreWeave made a late decision to lower its price target to $40, after initially setting the target at $47 to $55.
The company raised $1.5 billion in its share sale, making it the biggest U.S. IPO since 2021. However, it initially had targeted a $2.7-billion raise – and had at one point been expected to aim for $4 billion.
The stock opened at $39 and closed at $40.
CoreWeave CEO Michael Intrator told CNBC’s “Squawk Box” that the company needed to be realistic about the mood of investors right now.
“There’s a lot of headwinds in the macro,” he said. “And we definitely had to scale or rightsize the transaction for where the buying interest was.”
Although the IPO was somewhat disappointing given the hype, shares of CRWV have rallied this week. The stock surged 42% on Tuesday and 16.7% the next day.
The price had risen to $61.26 at the close of trading on Wednesday.
‘Macro headwinds’ meet sector headwinds
The scaled-back nature of CoreWeave’s public offering might not be enough to convince investors that an IPO market comeback is now in full swing after an extended lull.
But CoreWeave’s IPO was historic in the fact that it was the first AI pure-play to hit the stock market.
This made it seem to some analysts an important measure of investor sentiment over the AI market more broadly, and not just CoreWeave specifically.
If this were the case, the IPO probably also wasn’t enough to convince analysts that AI stocks are ready to pop again after its recent swoon.
Although it was “macro headwinds” that convinced CoreWeave to lower its share price, there are also sector headwinds facing AI companies after a long bull run for their stocks.
Primarily, there are questions about whether the scale of demand for artificial intelligence will be high enough to make AI companies profitable anytime in the near future.
However, CoreWeave’s IPO might actually say more about the company itself, rather than prove as a measure of investor appetite for AI stocks more broadly.
As Business Insider’s Emma Cosgrove notes, “CoreWeave’s customers are highly concentrated and its suppliers are even more so.”
The company also carries roughly $13 billion in debt. “The debt is the engine, it’s the fuel for this company,” Intrator told CNBC.
“We go out, we find great contracts with great counterparties that need massive scale computing to drive their business, and then we go ahead and we go back to our syndicate of lenders, and they give us the debt to stand up the clusters that will deliver revenue to the company.”
However, one risk for the company is the fact that Microsoft has accounted for 62% of its business, which is reportedly canceling leasing on data centers in the U.S. and Europe.
If Microsoft decides to pull back on its AI spend, the question is where CoreWeave will make up the lost revenue.
This is where having “highly concentrated” customers could prove problematic.
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