CoreWeave Gets a Downgrade. Why Its Core Scientific Deal Is Causing Concern.

CoreWeave rents out AI servers powered by Nvidia hardware. (Dreamstime)

While CoreWeave has gone from strength to strength since its IPO this year, the artificial-intelligence cloud company’s deal to buy data-center infrastructure partner Core Scientific is arousing skepticism on Wall Street.

CoreWeave shares have surged fourfold since the March initial public offering, which proved disappointing at first. It said Monday it would acquire Core Scientific in an all-stock deal to boost its data-center capacity.

The deal will bring long-term benefits but is likely to test the market’s willingness to continue valuing CoreWeave so highly now that it has to operate more of its own data centers, according to Stifel analyst Ruben Roy. He lowered his rating on the stock to Hold from Buy in a research note.

“We believe that the re-positioning of the company as a vertical data center provider changes the valuation structure,” Roy wrote. “As such, we view shares as fairly valued.”

Rather than leasing data centers from Core Scientific, CoreWeave will own them. That is expected to free CoreWeave from around $10 billion in future lease obligations and around $5 billion in committed capital expenditure, under the two companies’ existing contracts. Stifel’s Roy estimates CoreWeave will save around $6.9 billion in gross profit over the 12-year life of the contracts.

CoreWeave rents out Nvidia AI servers in the cloud. Its main deal is with Microsoft , which accounted for 72% of CoreWeave’s first-quarter revenue

While Roy raised his target price on the stock to $115 from $75, that still indicates potential for a significant fall from its current levels. CoreWeave was up 0.6% at $160.58 in premarket trading on Tuesday.

There are signs that the market is expecting that CoreWeave shares are due for a drop, likely when its IPO lockup expires in late September, allowing insiders and early investors to sell stock.

CoreWeave is buying Core Scientific at a share ratio that values the company at $9.0 billion, or $20.40 per share, based on CoreWeave’s closing price of $165.20 on Thursday. However, Core Scientific shares were down 0.5% at $14.75 in premarket trading on Tuesday, having fallen 18% on Monday, when the deal was announced.

“The prospect of being a more infrastructure-exposed company, while beneficial for long-term stability, may pressure [CoreWeave] stock’s multiple in the near term, until more material margin accretion and growth benefits are seen as a result,” wrote Roy. “This outlook could also be, at least in part, why Core Scientific traded down on the news as well.”

Write to Adam Clark at adam.clark@barrons.com