Core Scientific's Earnings Disappointment and Pending Merger: Is This the Bottom for a Turnaround Play?

The recent earnings report from Core Scientific (CORZ) has sent shockwaves through the digital asset and AI infrastructure sectors. With a 44.3% year-over-year revenue decline to $78.63 million and a 6% gross margin—down from 28% in 2024—the company's Q2 2025 results underscore the challenges of pivoting from a crypto-centric business model to a high-performance computing (HPC) and AI infrastructure play. Yet, the story is far from over. The pending $9 billion all-stock merger with CoreWeave (CRWV), now valued at a 30% discount to its initial terms, has created a valuation dislocation that could either catalyze a turnaround or deepen the company's woes.

The Earnings Dilemma: A Tale of Two Segments

Core Scientific's traditional digital asset self-mining segment, once the backbone of its revenue, has crumbled. Revenue from this unit fell 43.6% to $62.42 million, despite a 50% rise in bitcoin prices. Hosted mining revenue plummeted 73% to $5.64 million, reflecting the sector's broader struggles with profitability and regulatory uncertainty. Meanwhile, the colocation segment—a newer, more stable business—rose 93% to $10.56 million. This divergence highlights the company's strategic shift but also its fragility: colocation now accounts for just 13% of total revenue, and the business remains heavily reliant on a single client, CoreWeave, for 100% of its colocation revenue.

The financials tell a starker story. Gross profit collapsed to $5 million, and cash reserves fell 30% to $581.3 million. While CoreWeave funded $121.3 million in capital expenditures, the company's liquidity constraints and operational losses paint a picture of a business in transition. The question is whether this transition is worth the risk.

The Merger: Synergy or Sinking Ship?

The proposed merger with CoreWeave—a $17.2 billion-debt-laden AI hyperscaler—has become a focal point for investors. On paper, the deal promises $500 million in annual cost savings and access to 2.3 gigawatts of power capacity. CoreWeave's Q1 2025 revenue of $981.6 million (up 420% YoY) and a $25.9 billion revenue backlog suggest robust demand for its AI infrastructure. However, the merger's all-stock structure and lack of downside protection for Core Scientific shareholders have drawn sharp criticism.

Two Seas Capital, Core Scientific's largest active shareholder, argues the deal undervalues the company and exposes it to CoreWeave's stock volatility. Since the announcement, CoreWeave's shares have fallen 30%, reducing the effective value of the merger from $20.25 to $13 per Core Scientific share. CoreWeave's debt-to-EBITDA ratio of 15.9x (based on $606.1 million in adjusted EBITDA) and its reliance on Microsoft for 72% of first-quarter revenue further cloud the deal's long-term viability.

Valuation Dislocation and Market Sentiment

The market's reaction has been mixed. Analysts at Citi upgraded CoreWeave to “Buy” on the back of Microsoft's $30 billion Q3 AI spending, while HSBC initiated a “Sell” rating, citing long-term profitability risks. The Zacks Rank for Core Scientific remains a “Hold,” reflecting skepticism about near-term catalysts. Meanwhile, the broader AI infrastructure market is projected to grow to $399 billion by 2028, driven by surging demand for compute power.

Core Scientific's stock has traded at a discount to its intrinsic value, with a price-to-book ratio of 0.8x and a forward EV/EBITDA multiple of -10x (given its negative EBITDA). Yet, the company's strategic pivot to colocation and AI, coupled with the merger's potential to unlock synergies, could justify a re-rating. The key question is whether the market will reward this transformation or punish the execution risks.

The Investment Case: Turnaround Play or Speculative Bet?

For investors, the decision hinges on three factors:
1. Execution Risk: Core Scientific must diversify its client base and prove that its colocation business can scale beyond CoreWeave. The absence of new enterprise customers in Q2 is a red flag.
2. Merger Terms: A renegotiation of the deal to include price collars or cash components could mitigate shareholder risk. The current all-stock structure favors CoreWeave's interests.
3. AI Infrastructure Tailwinds: The sector's growth trajectory is undeniable, but CoreWeave's debt load and Core Scientific's operational losses create a high-stakes environment.

If the merger closes and CoreWeave's AI infrastructure gains traction, Core Scientific could become a key player in the HPC space. However, the path is fraught with volatility. For risk-tolerant investors, the current valuation offers a speculative entry point. For others, the lack of downside protection and operational clarity may warrant caution.

Conclusion: A High-Stakes Gamble

Core Scientific's Q2 earnings and merger with CoreWeave present a classic case of a company at a crossroads. The earnings report highlights the challenges of transitioning from a crypto-centric model to AI infrastructure, while the merger introduces both strategic opportunities and financial risks. The valuation dislocation, driven by CoreWeave's stock decline and shareholder opposition, creates a compelling but precarious investment thesis.

For those willing to bet on the AI revolution, Core Scientific could represent a bottoming opportunity. But the road ahead is uncertain. As the market awaits regulatory and shareholder approvals, the key will be whether the company can execute its vision without being dragged down by CoreWeave's debt and volatility. In the end, this is a high-stakes gamble—one that demands a clear-eyed assessment of both the potential and the peril.