The AI cloud computing leader CoreWeave (CRWV.US) has endured a nightmare quarter, with market concerns over an AI bubble and operational challenges coming to a head. The survival crisis of its second-largest client, OpenAI, has further intensified "red alert" pressure on the world’s largest next-gen cloud service provider. However, structural AI tailwinds remain robust, and with early signs of a turnaround and positive catalysts ahead, abandoning CoreWeave now may be premature. Analyst Uttam Dey draws parallels to historical cases like Alphabet, arguing the market’s negative reaction presents a buying opportunity, maintaining a "Strong Buy" rating.
**A Nightmare Quarter** In August, Dey upgraded CoreWeave to "Strong Buy," citing confidence in its capex plan to support future revenue recognition from its backlog. Driven by OpenAI’s massive spending, the backlog surged nearly 4x to $55 billion. Management initially projected 2025 revenue at ~$5.3 billion, with consensus 2026 revenue expectations at $12.14 billion.
However, Q3 took a sharp turn. Delays in capacity buildout due to a data center vendor issue pushed revenue recognition from Q3 to Q1 2025. GPU deployment targets were revised down from "over 900 MW" to 850 MW, and 2025 revenue guidance was trimmed to $5.1 billion. Dey attributes this to management’s overfocus on acquiring CoreScientific, diverting attention from client commitments. The deal, announced early in Q3, was vetoed by shareholders by quarter-end, creating operational risks that led to delays and a ~$200 million revenue shortfall this year.
To mitigate fallout, the CEO assured clients are securing capacity elsewhere with no attrition, though revenue recognition is deferred by a quarter. Despite plans for 2026 capex to "far exceed" double 2025 levels (over $24 billion), skepticism persists, with 2026 revenue pricing now at $12 billion.
**External Pressures Mount** OpenAI’s "red alert" has amplified doubts over CoreWeave’s ability to recognize its $22.4 billion backlog. This fear-driven scenario isn’t unprecedented—Alphabet’s 2023 "red alert" marked its stock bottom. Similarly, excessive pessimism surrounds CoreWeave today. As major cloud players potentially slow capex due to cash flow concerns, next-gen providers like CoreWeave could gain, targeting a 69% CAGR.
**Severe Undervaluation** First, the $12.14 billion 2026 revenue consensus appears conservative, given unbooked portions of the $55 billion backlog. Second, even excluding incremental growth, valuation remains low. CoreWeave’s current EV is ~5x 2026 revenue (135% growth), versus Dey’s justified 6.3x—implying 26% upside.
**Key Risks: Profitability & Debt** While gross margins hold steady at ~74%, GAAP operating margins fell to 4.3%. Pressure on profitability is expected, but avoiding major losses is critical. Rebuilding confidence requires demonstrating backlog growth, revenue expansion, and stable margins.
CoreWeave’s debt has ballooned to $18.8 billion, posing material risks. Management acknowledges the challenges of its "red alert" phase. Rapid data center expansion is capital-intensive, likely necessitating additional funding (e.g., a potential $2 billion convertible note in Q4 could push debt past $20 billion). The path to profitability hinges on delivering promised capacity and revenue growth. Dey warns that if profitability trends aren’t corrected next quarter, investors should exit.
**Upcoming Catalysts** Two near-term events could shift sentiment: the December 9–10 FOMC meeting and Oracle’s (ORCL.US) Q2 earnings, which may reveal OpenAI’s actual backlog health versus market pessimism.
**Bottom Line** CoreWeave faces its most significant existential test yet, balancing trust-building with clients and shareholders while proving it can meet commitments and sustain growth. Dey anticipates progress ahead, reiterating a "Strong Buy" amid prevailing fears.
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