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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Well, there it is:
CoreWeave is planning to slash the size of its initial public offering and bring in Nvidia as an anchor investor, another sign of wavering investor demand for artificial intelligence infrastructure on Wall Street.
The cloud computing provider will formally set the price of its shares later on Thursday and is expecting to pare back its offering to around $1.5bn, according to people close to the matter.
CoreWeave had initially targeted raising $4bn and dropped that figure to $2.7bn when it began a roadshow to generate interest for its shares last week.
No official details yet on float pricing and structure, including the size of Nvidia’s anchor, so things could still change. CNBC reported earlier that Nvidia’s fresh backing of CoreWeave would also include a $250mn order, presumably in addition to the $320mn of server time it agreed to buy in April 2023.
We write at length elsewhere about how reliant CoreWeave is on Nvidia, its sole GPU supplier, 5.97 per cent shareholder and second-biggest customer. We also mention how hard it’s been for CoreWeave’s team of 14 IPO advisers to convince the buy-side that its debt-burdened business model is sustainable.
On the one hand, bringing in Nvidia to shore up the IPO might be seen to deepen their relationship and guarantee early drops on new hardware that could provide a competitive advantage. On the other hand, it won’t make worries about concentration go away.
In an anonymous poll seen by FT Alphaville, RBC Capital Markets asked hedge-fund and long-only clients: “Does CoreWeave have a sustainable moat?” Ninety per cent voted no.
Here are a few of the clients’ explanations as to why:
Their moat is priority access to GPUs – that’s it
Capital/relationships are the barrier and won’t last
Near-term they have capacity which is needed but longer-term, no. Anyone can buy GPUs, put them into a cluster, and sell the capacity to larger players. Competing with the hyperscalers with deeper pocket books who are also doing this whole nother thing.
The business model is predicated on the scarcity of NVDA chips. If, and when, the market loosens a bit or a competing chip manufacturer ramps up, the need for their “conduit” business model will be less needed.
Equipment rental business with cost of capital being the only LT advantage . . .
In answer to “What is the least attractive financial aspect of CoreWeave’s financials?”, more than half of RBC survey respondents said “customer concentration” (meaning Microsoft and Nvidia). Respondents’ reasoning included:
CoreWeave’s largest customer [Microsoft] is publicly telling investors it no longer has any need for CoreWeave and will build its own datacenters from here on out
If this is truly ‘overflow’ capacity for MSFT, then this is a tough model to invest [in]
I don’t like that I would be investing in OpenAI by proxy and that feels like an investment that is a function of Sam Altman’s ability to raise capital, first MSFT, now SoftBank, then… Saudi Arabia? Further and further out the risk curve.
And under “What do you think investors are missing about the CoreWeave story?”, one money manager wrote:
NVDA is 15% of revs which they levered up to buy billions ($) of GPUs. Why does NVDA need to pay somebody to access their own GPUs? It is a gimmick to create competitive tension for GPUs outside of the hyperscalers to give NVDA pricing leverage. As big as CRWV is, it looks small relative to Stargate scale. Move downmarket will require customers hand-holding and features akin to a hyperscaler. That will be tough. In the meantime, the banks are racing to get the deal done and their bank loans refinanced with bonds before this story meets reality.
Official IPO pricing is due after the US closing bell, but it looks a lot like reality is already catching up.
Further reading:
— CoreWeave
