CoreWeave Delivers Another Blowout Quarter. Is It Enough To Save the AI Trade?

CoreWeave(NASDAQ:CRWV), the largest of the neoclouds, tumbled over the last month, dragging down the AI sector with it, after a social media post showed that its bond yields had reached as high as 15%. That observation set off another round of concerns that the AI build-out is unsustainable, and the issue has only been magnified since Democrats swept the midterm elections, in part by campaigning on increased regulation for data centers.

Against that backdrop, CoreWeave reported third-quarter results Tuesday afternoon, and the company made it clear that demand for its services, which essentially consist of renting AI compute, continues to skyrocket.

Revenue in the quarter jumped 168% to $3.66 billion, ahead of the analyst consensus at $3.54 billion. CoreWeave's revenue backlog improved from $104 billion at the end of the second quarter to $132.5 billion at the end of the third, another sign of strong demand.

Its generally accepted accounting principles (GAAP) operating margin also improved from 4% to 6% as GAAP operating income jumped from $52 million to $207 million.

However, CoreWeave has taken on tens of billions in debt to fund its rapid data center expansion and chip purchases, which have continued to weigh on the bottom line. Interest expense jumped from $310 million in the quarter a year ago to $846 million, and it finished the quarter with a GAAP net loss of $709 million, or $1.27 per share. That compared with expectations of a loss of $1.21 per share. On an adjusted basis, its net loss expanded from $41 million to $529 million, but improved slightly on a sequential basis.

On a free cash flow basis, CoreWeave lost $7.7 billion in the quarter, and its debt jumped to $47 billion.

What it means for AI stocks

Investors mostly shrugged off the earnings report, with the stock gaining modestly in after-hours trading, up 2% before its earnings call at 5 p.m. ET.

The report didn't seem to change many opinions on the stock, and that's understandable. CoreWeave reported another round of soaring revenue growth, but investors expected that, and it didn't show it was turning the corner on its balance sheet risk yet.

However, management said it would not use the unsecured debt market at current interest rates, which offers some encouragement to investors worried about its rising bond yields.

CoreWeave expects interest expense to continue to rise into the fourth quarter, reaching $1.05 billion-$1.15 billion on $4.7 billion-$5 billion in revenue as it raised its full-year revenue forecast to $13 billion-$13.3 billion. The fourth-quarter forecast implies revenue more than tripling.

On the earnings call, CEO Michael Intrator argued that prices for older GPUs had been resilient and were in fact rising, even for Nvidia chips that are three generations old.

That should offer some reassurance to investors, as should the company's plan to collect $9 billion in customer prepayments and deposits in the fourth quarter.

Still, the Fed is expected to raise interest rates at its next meeting in December after a hot Consumer Price Index report. CoreWeave has a current ratio below 0.5, and its interest expense is more than 20% of its revenue.

Its revenue growth is impressive, and its prospects are bright, but investors are understandably wary given current interest rates.

Overall, CoreWeave is making prudent decisions, and operating leverage is improving. With time, the stock should recover its recent losses if it remains on this path.

For the AI sector more broadly, from CoreWeave’s perspective, demand looks set to outstrip supply for years to come, and the company believes it has several levers to pull to fund the build-out. That should reassure any fears about a string of defaults crushing the industry.

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