This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
CoreWeave (CRWV), a cloud-based GPU-as-a-Service provider, has just taken a significant step towards vertical integration by purchasing the crypto miner, Core Scientific, in an all-stock deal. While the optics surrounding this deal are quite bullish, CoreWeave's depreciation policy raises ancillary concerns that can overshadow its overarching bullish thesis.
For the benefit of those who might not be aware, CoreWeave rents out NVIDIA's GPUs on the cloud, all packaged within an infrastructure that has been optimized to handle AI workloads. The company is able to do so by leveraging its unique partnership with NVIDIA, one that allows it to be among the first to offer access to NVIDIA's latest-gen GPUs at scale.
Moreover, CoreWeave uses a take-or-pay model, where its customers provide a predictable cash stream regardless of their utilization of the underlying compute resources. What's more, CoreWeave also requires its customers to prepay a significant sum of money upfront, which is then used to partially fund the requisite infrastructure build out for contractual performance.
This brings us to the crux of the matter. CoreWeave currently depreciates its GPUs over 6 years, as per a policy adopted back in 2023. In contrast, Nebius, which maintains a nearly identical business model, replete with CoreWeave's take-or-pay modus operandi, depreciates those same GPUs over 4 years.
This seemingly aberrant depreciation policy has a sizable impact on CoreWeave's bottom-line: artificially suppressing it's operating expenses and boosting it's operating income.
Do note that CoreWeave also uses its sizable stash of NVIDIA GPUs as collateral to obtain debt financing. A longer depreciating period allows for a higher book value of its pledged GPUs.
Of course, proponents point out that around 96 percent of CoreWeave's revenue stream consists of committed contracts, with performance duration extending to an average of 4 years. Essentially, CoreWeave's take-or-pay customers bear the vast majority of its interest and depreciation costs. Once a specific contract ends, CoreWeave is then free to use those liberated GPUs to generate revenue from Software-as-a-Service (SaaS) niche, transforming its erstwhile heavily depreciated asset into a monetizable one.
But, the question then arises: if CoreWeave's customers are already bearing its depreciation costs, why not adopt a much more rational 4-year depreciation period, as Nebius has done?
CoreWeave Acquires Core Scientific
Meanwhile, as stated earlier, CoreWeave has now reached a ~$9 billion, buyout agreement with Core Scientic. The deal values Core Scientific's 441 million fully diluted outstanding shares at around $20.40 per share. As such, each Core Scientific shareholder will receive 0.1235 CoreWeave shares.
This deal will allow CoreWeave to eliminate $10 billion in leasing overheads over the next 12 years. In fact, CoreWeave's annual savings through 2027 would amount to ~$500 million.
We noted recently that CoreWeave was rapidly approaching a whopping 2GW of total contracted power capacity. Well, this deal allows CoreWeave to significantly add to its existing power footprint by incorporating Core Scientific's ~840MW in HPC contracts-related power capacity, and a further 500MW worth of crypto mining-related electricity capacity, leaving an additional 1GW for potential expansion, as noted by Macquarie analyst Paul Golding:
"The deal expands CoreWeave's footprint, seeing it own ~1.3 GW of gross power across Core Scientific's US data center network, consisting of ~840 existing gross MW for Core Scientific's HPC contracts and ~500 gross MW crypto mining-allocated power capacity, plus an additional 1+ GW of potential gross power available for expansion."
Follow Wccftech on Google to get more of our news coverage in your feeds.
