CoreWeave’s (CRWV) Ascent Implies That with Great Data Comes Great Responsibility

CoreWeave Inc. (NASDAQ:CRWV) has delivered edge-of-the-seat excitement for investors this year. A gravity-defying one-month gain of 145% in May has brought its YTD tally to around 160%, an impressive performance for a stock in the over $10 billion market capitalization bracket.

Indeed, much of this rally has been news-driven (and not speculation), including Nvidia’s (NASDAQ:NVDA) revelation of a 7% stake (as of March end) and a string of high-profile contracts. The latest being the $4.0 billion expansion deal with OpenAI, which already has an existing agreement with the company worth up to $12 billion, and the signing of a new hyperscaler client.

But as Isaac Newton reminded us, what goes up must come down. After such a meteoric rise, some investors are asking the inevitable question: Can the rally continue or even sustain at these levels?

Pat Burton, senior managing director at Winslow Capital Management, recently argued that the risk-reward is unfavourable for CoreWeave compared to more stable companies like Microsoft.

That cautious view is gaining traction, even as the stock price scales new highs. According to a May 23 Bloomberg report, data from S3 Partners LLC shows that short interest in CoreWeave shares, as measured by the percentage of shares borrowed by short sellers, has surged from 18% in late April to 45% earlier in the week.

Theoretically, this increased short interest could result in a short squeeze, in which short sellers are forced to buy additional shares to cover their positions as prices rise. But according to S3 Partners’ analysis, a squeeze is unlikely to deter them as the market appears to have ample appetite to initiate new short positions.

So, what’s spooking some of these investors despite Nvidia’s backing and rapid topline growth?

The most prominent concern is CoreWeave’s balance sheet leverage. The company is piling up massive debt at a relatively higher cost to fund its capital expenditure plans. Bloomberg notes that its debt-to-total assets ratio climbed to 54% by March 31, well above the 30% average of the Nasdaq 100 index.

Another growing concern is whether AI demand is beginning to peak after some major tech companies have scaled back their investment in AI infrastructure, sparking fears that CoreWeave’s growth may not be as sustainable as hoped.

Among notable names that have made their cautious view clear is D.A. Davidson analyst Gil Luria. Luria downgraded the stock to Underperform (May 15) with a price target of $36, when the stock was trading at around $66. In very blunt terms, he stated the business is not worth scaling because of its lower return on investment. Greg Miller from Citizens JMP, who recently initiated coverage on CoreWeave with a Hold rating, asked investors to be on the sidelines as the current risks are too high.