The Shaky Economics Behind CoreWeave (And Why Nvidia Stepped In)

**Zaid Admani** (0:00)
Welcome back to The Rundown, interview edition. Today, we are talking to Gil Luria, the managing director of technology research at DA. Davidson. Gil has been covering tech for a long time, and he has a really interesting perspective on the AI trade. So in today's conversation, we covered a ton of topics, including CoreWeave's earnings, and whether the NeoCloud model can compete with the hyperscalers. We also get into Nvidia's partnership with Wall Street to finance more than $500 billion of AI infrastructure, and whether this AI spending cycle is becoming too circular. Finally, we end the conversation talking about Palantir and why Gil calls it the best story in all of software. This was a fantastic conversation. Gil brought a lot of great insights, and I think you guys are going to really enjoy this one. So let's get into it. All right, guys, today we are joined by Gil Luria, the head of tech research at DA. Davidson. This is Gil's second time on the Rundown. So Gil, welcome back.

**Gil Luria** (0:58)
Thanks for having me.

**Zaid Admani** (1:01)
I'm super excited for today's conversation. There's a lot going on right now in the market, especially with the Neo clouds. We had CoreWeave report earnings this week, and also Nebius. So I want to start with the conversation there.
Nebius earnings were solid. Numbers were, revenues doubled compared to a year ago. Backlog grew to $130 billion. Margins are finally starting to move in the right direction. The stock popped 20% post earnings. I was reading your note on it, though, and you still have a neutral rating on the stock.
What is keeping you from getting more bullish on CoreWeave?

**Gil Luria** (1:39)
They still don't make any money. Let's start with that. Okay. We're not sure that this category is even a worthwhile category, right? The Neo cloud category is the marginal provider of compute. And we talk about tides, right? When the tide is rising, guess which boats get lifted highest? The smallest boats. The ones that have the most leverage to an incremental buyer of compute. That's CoreWeave, Nebius and other Neo clouds. So of course, right now, when there's an unbelievable shortage of AI compute, there's an enormous gap between demand for AI compute and supply of AI compute. These are the companies that are gonna benefit the most.
That's why they're doing so well right now when there's such a shortage of compute. The longer question is, are these worthwhile businesses? Will they generate the types of economic returns that can justify their cost of capital? The jury is out on those things. I believe that right now, the evidence is that they will not, over time, be able to even return the rate of capital that they borrow at, but they raise at, certainly not above that.
Not right now.

**Zaid Admani** (2:55)
I'm so happy you're bringing this up. I'm so happy you're bringing this up because I made the same point when I was talking about Nebius' earnings. We covered it on the show. Sorry, not Nebius' earnings, but CoreWeave's earnings when we covered it on the show a couple days ago. And I've been saying the same thing. I'm a little skeptical of the whole NeoCloud model. Just long-term, I'm not sure how they're gonna be able to compete with the hyperscalers, Microsoft, Google, Amazon. Those hyperscalers have access to much cheaper capital.
So I don't really know how, what is the long-term moat that these NeoClouds like Nebius and CoreWeave have when it comes to these hyperscalers?

**Gil Luria** (3:32)
They don't.
Let's go back to Finance 101 What's the job of a business? The job of a business is to generate return on invested capital that's higher than their cost of capital. So if I'm investing in something, if I'm borrowing, investing something, the return I get needs to be higher than the cost of borrowing. Otherwise, I am not a worthwhile endeavor. I should not exist as a business. Let's talk, CoreWeave is really, it's so vivid that it's probably even better example than Nebius. Nebius is actually a little bit more of a nuanced story, but let's talk about CoreWeave. CoreWeave's cost of borrowing is now 9 percent. To get capital, CoreWeave needs to raise it 9 percent. Their return on capital right now, as of last quarter, is less than 1 percent. By the fourth quarter, they're saying their margins are gonna expand dramatically by the fourth quarter to what they're saying is mid-teen margins. But if you take that and you look at what that means for return, that's still around 4 percent return. So, they're borrowing at 9 percent to generate a 4 percent return, right?