CoreWeave IPO puts a new twist on Big Tech’s ‘power law’

{"text":[[{"start":null,"text":"

"}],[{"start":9.23,"text":"Venture capitalists have a concept they call the “power law” — the idea that the bulk of returns in a portfolio comes from just a few investments. "},{"start":16.884,"text":"CoreWeave, a US data-centre operator that has filed for an initial public offering, offers a new variation on this theme. "}],[{"start":24.64,"text":"CoreWeave provides computing capacity for companies who want to train and use artificial intelligence. "},{"start":30.007,"text":"Simply put, it rents out Nvidia microchips, and lots of them. "},{"start":34.074,"text":"CoreWeave’s 250,000-plus processors in 32 data centres are more than double what Elon Musk’s supercomputer, Colossus, had at the end of 2024. "},{"start":43.379000000000005,"text":"Demand is brisk: by the end of last year, revenue was growing at an annualised 170 per cent. "}],[{"start":50.39,"text":"When it goes public, CoreWeave will reflect the classic power law in that its original investors will have done very well indeed. "},{"start":57.182,"text":"Assume its ebitda more than doubles to $3bn this year. "},{"start":61.524,"text":"Pop that on the same 15-times multiple that AI ‘hyperscalers’ Meta Platforms and Amazon enjoy, strip out around $6.5bn of net debt, and the company’s equity — not including new money raised — could be worth close to $40bn. "}],[{"start":76.28999999999999,"text":"The catch is that the notion of big-overshadows-small, familiar in VC portfolios, manifests at CoreWeave in less helpful ways too. "},{"start":84.30699999999999,"text":"There’s the outsized might of a handful of suppliers. "},{"start":87.237,"text":"Three of them — chiefly Nvidia, presumably — supplied three-quarters of CoreWeave’s material and product purchases in 2024. "},{"start":94.74199999999999,"text":"Its customer base is even more skewed: Microsoft alone accounted for 62 per cent of revenue in 2024. "}],[{"start":null,"text":""}],[{"start":102.13999999999999,"text":"Close ties to Nvidia and Microsoft are, of course, the secret sauce. "},{"start":106.98199999999999,"text":"But any big dependency is a valuation risk. "},{"start":109.77399999999999,"text":"Microsoft procures data centre space not just for itself but for ChatGPT owner OpenAI. "},{"start":115.56699999999998,"text":"But Sam Altman’s company is also building its own giant data centres. "},{"start":119.53399999999999,"text":"While CoreWeave sees a nearly-$400bn market by 2028, the eventual calculus of who needs what from whom is still up for grabs. "}],[{"start":127.98999999999998,"text":"This isn’t a problem for now — CoreWeave reckons it has around $8bn of revenue due over the next two years, versus less than $2bn in 2024. "},{"start":137.28199999999998,"text":"But unless it diversifies fast, the company’s new investors will spend much time nervously watching for signs that the relationship remains intact. "}],[{"start":145.89,"text":"This being Silicon Valley, CoreWeave’s shareholder base is lopsided too. "},{"start":150.582,"text":"Insiders including co-founder and chief executive Michael Intrator control the company with more than 80 per cent of the votes. "},{"start":156.91199999999998,"text":"While some trimmed their stakes in recent tender offers, they will retain stock with 10 times the voting power of other shareholders. "},{"start":163.47899999999998,"text":"New investors will have little say on anything that matters. "}],[{"start":167.04,"text":"Don’t expect this to stand in the way of a roaring IPO. "},{"start":170.569,"text":"CoreWeave will be the only big pure-play AI data-centre company on the US market. "},{"start":175.099,"text":"For retail investors who have grown rich on Nvidia stock, it will be a second bite at the AI cherry. "},{"start":180.642,"text":"Investors just have to remember the real power law: in a company dominated by a few big customers, suppliers and shareholders, everyone else can end up an afterthought. "}],[{"start":189.39,"text":""}]],"url":"https://d33mkcasurz97s.cloudfront.net/album/195293-1741080138.mp3"}