CoreWeave's stock has been red hot, but this rival may be a better investment

CoreWeave's stock rallied 46% recently, including a 12% jump on its $14.2 billion Meta deal, but D.A. Davidson maintains an "underperform" rating due to concerns over its capital structure, low returns on borrowed assets, and concentrated customer base. The firm instead advocates for rival Nebius Group, which has also surged 70% and secured a $17.4 billion Microsoft deal, as a more compelling investment. Nebius is favored for its "noticeable discount" on a backlog basis ($20B backlog vs. $28B market cap compared to CoreWeave's $30B backlog vs. $60B market cap), higher-quality backlog, broader customer base, and a more flexible capital structure enabling non-core asset sales over increased debt, offering superior unit economics and upside potential.

Analysis

CoreWeave's (CRWV) stock has experienced significant momentum, rallying 46% in the last month, including a 12% rise following a $14.2 billion cloud agreement with Meta Platforms (META). Despite this, D.A. Davidson maintains an 'underperform' rating, citing fundamental weaknesses. The primary concerns revolve around CoreWeave's capital structure, highlighted by the firm generating returns below 5% on assets acquired through debt costing over 9%. This high-leverage model, which uses its Nvidia (NVDA) GPUs as collateral, is expected to require further capital raises. Additionally, analysts note CoreWeave's highly concentrated customer base as its greatest risk. In contrast, rival neocloud Nebius Group (NBIS) is presented as a more compelling investment, trading at a 'noticeable discount' with a $28 billion market cap on a $20 billion revenue backlog, compared to CoreWeave's $60 billion cap on a $30 billion backlog. Nebius, which recently secured a $17.4 billion deal with Microsoft (MSFT) and has seen its stock surge 70%, is favored for its broader customer strategy, lower capital expenditures, and a more flexible capital structure that allows for raising funds by selling non-core assets rather than taking on additional debt.

Key Decisions for Investors

• Investors should look beyond CoreWeave's headline deal and perform a comparative valuation against Nebius, focusing on the backlog-to-market cap ratio, which currently favors Nebius.
• For those holding or considering CoreWeave, it is critical to scrutinize its capital structure, particularly its negative arbitrage of borrowing at over 9% for assets returning less than 5%, and monitor for potentially dilutive future capital raises.
• Consider Nebius Group as a potentially undervalued alternative for AI infrastructure exposure, given its strong Microsoft contract, diversified customer strategy, and a more flexible funding model that reduces reliance on debt.
• A key factor to monitor for both companies is customer diversification, as any de-concentration of CoreWeave's customer base or further high-profile wins for Nebius could significantly alter their respective risk profiles.