CoreWeave’s $2.1bn mirage: When ‘numbers’ become ‘narratives’ - Sean Peche

CoreWeave's June quarter results show a stark gap between GAAP and adjusted numbers. The AI cloud computing firm reported a $626m net loss under standard accounting, against a $1.5bn adjusted EBITDA figure, a $2.1bn swing driven largely by excluding stock-based compensation and acquisition costs. Portfolio manager Sean Peche of Ranmore Fund Management argues the adjustments flatter a business straining under a weak balance sheet: current liabilities exceed current assets by $11.4bn, unrestricted cash stands at $5.5bn against $10bn of payables and accrued liabilities, and $41bn in long-term debt looms. Interest costs already consume a quarter of quarterly revenue, and recently issued bonds trade below par. Peche suspects an equity injection may be needed.

By Sean Peche*

Wiktionary says there are 606 words with the prefix “Neo”, meaning "new" - the opposite of "paleo".

Neonate, neoliberalist, and the pervasive “Neocloud”.

Here's mine - “Neoaccounting” – neo adjustments required for positive EBITDA.

Practised by neoclouds like Coreweave.

In the June 26 quarter, “paleo” accounting said they lost $626m.

But Neoaccounting or “Adjusted EBITDA”, says they “made” $1.5bn.

An impressive $2.1bn swing with revenue of only $2.6bn ...

Although +59% Adjusted EBITDA margin looks much better than a Net loss margin of -24%.

These adjustments included:

“Acquisition related costs” excluded because they are “inconsistent in amount and frequency, and do not correlate to the operation of our business”.

So why is stock-based compensation excluded?

• It’s very “consistent” – high and increasing

• unfortunately “frequent”, and

• “correlated to the operation of their business”

And is "compute" really so profitable if Depreciation is 54% of revenue?

Anyway, what’s the truth?

A GAAP loss of $626m or adjusted EBITDA of $1.5bn?

Well, Cash from operating activities was $679m, but deduct 5.7bn)

But that capex included “capitalised internal-use software”.

Meaning a worse GAAP loss if expensed ...

And the balance sheet?

Current assets of $9.5bn with current liabilities of $20.9bn, suggesting a liquidity shortfall of $11.4bn over the next year.

Somewhat concerning after raising $10bn last quarter.

And only $5.5bn of unrestricted cash left - insufficient to settle their $10bn of accounts payable + accrued liabilities … not to mention the $41bn of long-term debt & lease liabilities.

Maybe they can borrow more.

But the interest expense is already 25% of quarterly revenue.

And the coupons were 9.65% ($) and 8.5%(€) when they borrowed 2 months ago.

Those bonds are already below par, yielding 11.6% and 10.2%.

So I suspect an equity injection is needed.

Except management seemed happy using phrases like: “an exceptional quarter”, “incredible progress”, and “extraordinary execution” so maybe I'm wrong...

Their presentation said, “We use non-GAAP financial measures to make strategic decisions, establish business plans and forecasts, identify trends affecting our business & evaluate operating performance.”

And then say “we believe that these non-GAAP financial measures … may be helpful to investors…”

No thanks - there’s a reason my handle is #numbersnotnarrative.

If Coreweave really is the “Essential cloud for AI”, then I’m concerned.

Because all I see are GAAP losses and a very weak balance sheet.

Give me “paleo accounting” every day of the week.

*Sean Peche is a Portfolio Manager at Ranmore Fund Management Ltd.

Disclosure:

Ranmore Global Equity Fund has no position in any of the securities mentioned. This is not advice, do your own work.