Was CoreWeave's $9 Billion Enough for Core Scientific?

Maybe Core Scientific was right. About a year ago, the company rebuffed CoreWeave's offer of $5.75 per share, cash, a valuation of around $1 billion.

On Monday, Core Scientific said yes to a new deal, valued at around $9 billion in CoreWeave stock, or roughly twice Core Scientific's market cap. The deal is due to close in the fourth quarter.

A great outcome, right? Core Scientific investors disagreed. Its shares fell nearly 18% on NASDAQ yesterday, to $14.83, after the deal was announced. CoreWeave's stock fell too, roughly 3%.

GPU Contenders

Both companies are in the business of offering GPUs as a service. CoreWeave is larger, with a footprint of 32 datacenters and counting (including capacity taken out at Core Scientific), and its IPO in March drew fanfare and headlines (and some deserved skepticism).

Core Scientific, which operates nine datacenter sites in the US, has a bumpier story. The company was founded to serve cryptocurrency miners, as was CoreWeave, and went public in 2022 via a SPAC merger. That went poorly; by year's end, the company had filed for Chapter 11 bankruptcy protection. Core Scientific re-emerged on NASDAQ at the start of 2024.

As noted above, CoreWeave also became a Core Scientific customer. That relationship got supercharged with a 12-year contract announced in June. Including an option that CoreWeave exercised in October, the deal represented $8.7 billion in revenues, cumulatively, for Core Scientific. (Core Scientific's Q1 earnings call in May upped that figure to more than $10 billion, not including power charges that are passed through to CoreWeave.)

The acquisition would evaporate those revenues, as The Information pointed out. Shareholders who had seen the stock rise from a $6.21 twelve-month low in June won't get to see that 12-year contract play out.

What CoreWeave gains out of the deal is dedicated capacity under its control. Its press release talks of "verticalizing" Core Scientific's infrastructure, which likely means filling those datacenters with CoreWeave work rather than bitcoin miners.

Interestingly, CoreWeave is paying for most of the capex associated with that 12-year contract. In a sense, completing Core Scientific's planned expansions will be mostly a wash.

Ghosts of Nortel

Note, also, that the deal is entirely in CoreWeave stock, which at the moment is a pretty rich currency. That might stay the case, but it's hard not to think about the all-stock acquisitions of bubbles past, where companies enjoying a run of hype overpaid for deals that sometimes crashed. Nortel, for example, executed turn-of-the-century transactions worth billions on paper, sometimes without ever producing a product. Shares of both companies have fallen since the deal was announced, reducing the aggregate value of the combined entity.

That's not a proper comparison to Core Scientific, which absolutely does have a product and appears to be executing well on it. It would seem, though, that at least some of the reasoning behind the deal is that CoreWeave has the currency, in the form of high-priced stock, to buy its way out of what is effectively a debt obligation and gain control over a good chunk of capacity. Whether that's truly worth $9 billion even on paper is fair ground for debate.