CoreWeave's Inorganic Expansion: A Shift towards AI-Driven Vertical Integration.

CoreWeave has acquired Core Scientific, strengthening its vertical integration and aligning with the power-intensive AI industry. This move gives the company more control over its cloud product. While long-term upside is present, risk limits are tightening.

CoreWeave has announced its anticipated acquisition of Core Scientific, a significant move that aims to bolster its vertical integration and align with the power-intensive AI industry. The deal, valued at $9 billion, is set to close in the fourth quarter of this year. This acquisition is expected to enhance CoreWeave's control over its cloud product and reduce future operating costs.

Key Benefits and Strategic Rationale

The acquisition offers several key benefits for CoreWeave. Firstly, it secures 1.3 Gigawatts (GW) of existing data center capacity, including 840 Megawatts (MW) already leased to CoreWeave and 500 MW of repurposed crypto infrastructure. Additionally, CoreWeave gains access to over 1 GW of future power contracts, a critical resource in the AI workloads landscape as highlighted by Microsoft CEO Satya Nadella's emphasis on "power constraints" over chip shortages [1].

Secondly, the acquisition eliminates $10 billion in future lease obligations, resulting in an estimated $500 million in annual savings by 2027. This cost reduction is a significant advantage, especially given the high forward P/E multiple of 18 [1].

Lastly, the deal allows CoreWeave to repurpose or sell the 500 MW of Bitcoin mining data centers, providing additional financial flexibility. The acquisition is structured as an all-stock deal, with Core Scientific shareholders receiving 0.1235 shares of CoreWeave for each share, diluting existing CoreWeave shareholders but granting Core Scientific's former owners less than 10% of the combined entity [2].

Risks and Valuation Concerns

Despite the strategic benefits, the acquisition carries risks. Core Scientific's Q1 2025 revenue fell by 56% to $79.5 million, with Bitcoin mining revenue collapsing by 75%. Its net income spike to $580 million was driven by non-cash warrant adjustments, not operational success [2]. The $9 billion valuation implies a 18x forward P/E multiple on projected cost savings, but its debt ($1.12B) and negative operating cash flow (-$40.6M) weaken its standalone appeal [2].

Analysts have raised concerns about the overvaluation of CoreWeave and the risks associated with its reliance on Nvidia's GPU supply chain. D.A. Davidson's Gil Luria notes that the acquisition is more about securing capacity than driving growth, while Mizuho has downgraded CoreWeave to "Neutral" due to overvaluation risks [2].

Investment Implications

The acquisition strengthens CoreWeave's position in the AI infrastructure market, but investors should be mindful of the risks. While the long-term upside is present, the tightening of risk limits may temper enthusiasm for the stock. Before investing, it is advisable to consider the broader market landscape and CoreWeave's execution of its strategic vision.

References

[1] https://www.nasdaq.com/articles/why-coreweaves-acquisition-core-scientific-brilliant-move
[2] https://www.ainvest.com/news/coreweave-9-billion-core-scientific-acquisition-overpayment-risk-strategic-masterstroke-2507/