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SUMMARY
Parkev Tatevosian, CFA, compares CoreWeave and Nebius Group, two of the fastest-growing AI infrastructure companies, analyzing their revenue growth, scale, valuation, and future risks. The discussion highlights the companies' differing growth trajectories, financial outlooks, and competitive landscape to determine which presents a more attractive investment.
MAIN POINTS
- Introduction of CoreWeave and Nebius Group as leading AI stocks, with a focus on revenue growth, size, and valuation.
- Explanation of why major companies rent data center capacity from Nebius and CoreWeave instead of building their own.
- Comparison of revenue forecasts and discussion of the importance of scale and potential for profitability.
- Presentation of discounted cash flow valuations for both companies, showing CoreWeave as undervalued and Nebius as slightly overvalued.
- Assessment of competitive risks from companies like Meta, SpaceX, and Alphabet entering the data center rental market.
- Long-term uncertainty about the sustainability of current revenues and the ability to renew contracts at similar prices.
DETAILED ANALYSIS
CoreWeave and Nebius Group are positioned at the forefront of the rapidly expanding AI infrastructure sector, offering data center computing capacity to major technology clients. Both companies have secured substantial contracts, providing a high degree of confidence in their near-term revenue projections. Nebius Group stands out for its extraordinary growth rate, with analysts forecasting revenue to surge from $100 million to $21.8 billion between 2024 and 2028.
CoreWeave, while growing at a slower percentage rate, is operating from a larger base and is expected to reach $40 billion in revenue by 2028, making it the larger of the two.
The business model of renting versus owning data center capacity is likened to the real estate market, where companies choose to rent for flexibility and to avoid the significant upfront capital required to build their own infrastructure. This flexibility is a key driver of demand for both Nebius and CoreWeave's services. However, both companies are currently operating with significant negative free cash flow due to heavy investments in data center construction.
For Nebius, analysts project nearly $20 billion in negative free cash flow annually through 2028, with a turnaround to positive cash flow expected by 2029. CoreWeave follows a similar trajectory, with negative cash flow through 2028 and a projected shift to positive territory in 2029.
Valuation analysis using discounted cash flow models suggests that CoreWeave is currently undervalued, with a fair value estimate of $116 per share against a market price of $83. In contrast, Nebius Group appears slightly overvalued, with a fair value of $167 per share compared to a market price of $210. Forward price-to-sales ratios reinforce this view, as CoreWeave trades at a lower multiple than Nebius, reflecting its larger scale and potentially lower risk profile.
Despite Nebius's faster growth, CoreWeave's size may enable it to achieve profitability and positive free cash flow sooner, benefiting from economies of scale.
A significant emerging risk is the increasing competition from established technology giants like Meta Platforms, SpaceX, SoftBank, and Alphabet, which are also renting out excess computing capacity. This influx of supply could pressure prices and impact the long-term revenue potential for both Nebius and CoreWeave. While current contracts provide revenue visibility for the next several years, there is uncertainty regarding the ability to renew contracts at similar terms once they expire.
This long-term risk tempers the otherwise strong growth outlook, leading to the conclusion that, given the current valuations and scale, CoreWeave presents a more attractive investment opportunity despite both companies' speculative nature.
LINKS
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