Why CoreWeave's Acquisition of Core Scientific Is a Brilliant Move

Key Points

• CoreWeave announced its anticipated acquisition of Core Scientific on Monday.
• The deal has several benefits for CoreWeave and very little risk.
• However, whether CoreWeave is a buy on this news is an open question following the stock's quadrupling this year.
• 10 stocks we like better than CoreWeave ›

On Monday, July 7, AI infrastructure darling CoreWeave (NASDAQ: CRWV) announced it would be acquiring Bitcoin miner Core Scientific (NASDAQ: CORZ) in an all-stock deal.

Large acquisitions like this $9 billion venture can sometimes blow up in the acquiror's face. However, delving into the details of this deal's terms, not only does the combined company appear to have a high-probability of realizing significant benefits, but the acquisition also appears to have limited risks relative to typical large deals.

Three big benefits

In this deal, CoreWeave is essentially acquiring its landlord. Founded in 2017, Core Scientific had been a Bitcoin miner, but has more recently been transforming itself into an AI data center co-location host for others, most notably CoreWeave.

CoreWeave's rationale for the deal essentially comprises three big points: secure future capacity, operational cost savings, and a lower financial cost of capital.

On capacity, CoreWeave will acquire Core Scientific's current 1.3 Gigawatt (GW) data center footprint, including 840 Megawatts (MW) of data centers leased to CoreWeave, along with 500 MW of Core Scientific's Bitcoin mining infrastructure, which can either be repurposed or sold. In addition, and perhaps more important, CoreWeave will acquire over 1 GW of future capacity that Core Scientific has contracted with power providers.

The future 1 GW is so important because power capacity is the one big bottleneck in the AI world today. Earlier this year, Microsoft CEO Satya Nadella noted Microsoft was no longer "chip-constrained," in terms of access to Nvidia (NASDAQ: NVDA) GPUs, but rather "power-constrained." Therefore, CoreWeave's securing of contracted future power capacity significantly derisks its growth plans.

And of course, since CoreWeave will now own its infrastructure, it will save $10 billion in future lease payments, thereby cutting out the margin on those lease payments that would have gone to Core Scientific's bottom line. In the acquisition presentation, CoreWeave management noted operational and lease payment savings will net out to over $500 million annually by the end of 2027. At the $9 billion acquisition value, that means CoreWeave is acquiring these cost savings at an 18 forward P/E multiple.

That's not only a reasonable market multiple, but CoreWeave is also getting the aforementioned capacity for future growth and 500 MW of Bitcoin mining data centers on top, which CoreWeave can either repurpose or sell.

Lease and operational savings also aren't the only savings CoreWeave will realize. As CoreWeave expands, it will have to finance its expansion with either equity or debt. To that end, management noted the combined companies should be able to save "several hundred basis points" on the interest rate it will pay on debt it will need to fund future growth capital expenditures, because of the larger company's size and scale.

Image source: Getty Images.

Risks mitigated

Normally, major acquisitions entail a certain amount of risk from taking on debt, overpaying, or not realizing anticipated synergies. But in this case, CoreWeave seems to have mitigated all the typical of major acquisition pitfalls.

First, CoreWeave isn't using any debt for the acquisition, so it's not increasing the combined companies' leverage ratio. Of course, both CoreWeave and Core Scientific each use debt in their existing capital structures already, so buying Core Scientific with all equity made sense.

Not only was paying with equity a necessity, but CoreWeave's high stock price, which has quadrupled over the past three months, makes the Core Scientific buy look quite cheap. Using CoreWeave's March IPO price of $40 would have essentially increased this acquisition's cost four times over. The quadrupling of CoreWeave's stock since then and using that high-priced stock as currency with one quarter the share dilution makes it hard to conclude that CoreWeave is overpaying.

And in terms of fully realizing anticipated synergies, the cost savings of the deal are fairly automatic. CoreWeave was already on the hook for $10 billion in future lease payments to Core Scientific, and CoreWeave will simply not have to make those payments now.

In short, selling high-priced stock -- some might even say overvalued stock -- to pay off a debt in the form of future lease payments is a pretty sensible move that has probably increased the intrinsic value of the company.

What does Core Scientific get out of it?

Some might ask what Core Scientific's angle is here, since it essentially agreed to be acquired with CoreWeave's high-priced stock.

There are probably two reasons: one defensive and one offensive. On the defensive side, Core Scientific was in the middle of a business pivot, as its traditional Bitcoin mining operations had became less profitable. In April 2024, there was a Bitcoin halving, which means miners receive only half as much Bitcoin for each new block mined. As a result, Core Scientific's revenue and profits from mining fell significantly over the past year, which was also exacerbated by its transition to a data center host for CoreWeave and other AI companies.

Core Scientific also likely saw CoreWeave's potential as the current leading AI neocloud being a more attractive business than essentially being a landlord for CoreWeave and others. It's also possible that CoreWeave has expertise in running AI clusters that Core Scientific didn't possess, which would make a potential Core Scientific transition into an AI neocloud itself -- essentially a competitor to CoreWeave -- much harder.

Thus, the prospect of combining with CoreWeave to become the largest-scaled AI neocloud was too good a future opportunity to pass up, even if Core Scientific shareholders had to pay a fancy-looking price today.

CoreWeave still has risks, but is less risky post-acquisition

The acquisition is expected to close in the fourth quarter of this year. When it does, CoreWeave will undoubtedly be a stronger company. However, whether that makes the stock attractive depends on future execution. CoreWeave's valuation is still quite high, and it continues to carry the risks of its somewhat circular relationship with Nvidia.

However, in terms of its debt load, operating cost burdens, and future growth capacity, those risks seem to have been lessened by this attractive deal with Core Scientific.