After the official announcement of the acquisition of "Landlord," why did the popular AI darling CoreWeave plummet?

The $9 billion all-stock deal for AI cloud computing company CoreWeave to acquire data center operator Core Scientific has encountered market indifference, with both companies' stock prices plummeting. Analysts say this highlights investors' concerns about valuation bubbles in the AI sector.

Since the acquisition announcement on July 7, Core Scientific's stock price has fallen by a cumulative 25%. On Monday, it halted a five-day decline, but its market value has shrunk to $6 billion, which is $1.2 billion lower than the stock value offered by CoreWeave. Even more surprisingly, CoreWeave, as the acquirer, has seen its stock price drop by 20% during the same period, with a market value evaporating by over $12 billion.

Analysts point out that the selling behavior of Core Scientific shareholders reflects their distrust of CoreWeave's stock as a means of payment, as well as doubts about whether this AI company, valued at $64 billion with a price-to-sales ratio of up to 13 times but not yet profitable, can maintain its valuation.

Additionally, this unusual market reaction exposes the reality of overvaluation for some companies amid the AI boom and serves as a warning bell for the current record stock market rally.

Shareholders Vote with Their Feet, Transaction Premium Loses Appeal

The reaction of Core Scientific shareholders is quite rare. Typically, when a large company offers a premium acquisition, the target company's shareholders do not choose to flee. However, Core Scientific's market value has fallen to $6 billion, which is $1.2 billion lower than the stock value offered by CoreWeave, while the transaction premium rate remains at a high of 21%.

According to media reports, the two companies began negotiations as early as June 26. Before the news broke, Core Scientific's stock price was around $12, about $1 lower than the current level. In contrast, the initial acquisition proposal valued Core Scientific at about $20 per share.

This unusual price gap indicates that Core Scientific shareholders believe that rather than accepting CoreWeave's stock, it would be better to maintain the company's independent operations for better returns. Investors are clearly skeptical of CoreWeave's valuation of up to $64 billion, especially considering that the company has not yet turned a profit and that 72% of its revenue last quarter came from a single client, Microsoft.

Reports indicate that CoreWeave, as an AI cloud computing company, is a tenant of Core Scientific, leasing data center infrastructure from the latter and needing to pay over $10 billion in lease fees to Core Scientific over the next 12 years. This "tenant acquiring landlord" arrangement was supposed to be a hot deal in the AI field but unexpectedly burst the valuation bubble for both parties

Scarcity of Circulating Shares Drives Up Valuation, Upcoming Unlocking Wave Adds Uncertainty

CoreWeave went public in March this year at a price of $40 per share, and by the end of June, it had soared to $187, an increase of over three times.

The company has only about 47 million shares (13% of total shares) available for public trading, and the scarcity of circulating shares has propelled the stock price upward, creating a bottleneck for investors trying to buy in.

The scarcity of circulating shares also makes shorting extremely expensive, reducing arbitrageurs' opportunities to profit from price inefficiencies. However, Core Scientific shareholders do not need to short CoreWeave stock to express a bearish view; they can directly sell their Core Scientific shares to exit.

Another concern is that the lock-up agreement for CoreWeave shareholders will expire on September 24. At that time, insiders and early investors will be free to sell approximately 290 million shares, and this potential selling pressure could weigh on CoreWeave's stock price before the transaction is completed.

Signs of Cooling AI Frenzy, Trading Outlook in Doubt

Reports indicate that the twists and turns of this acquisition reflect deeper issues within the AI frenzy. Against the backdrop of stock market indices hitting new highs and AI concept stocks being highly sought after, investors are beginning to question whether some AI companies are overvalued.

Analysis suggests that given the significant price gap in the transaction, it is very likely that this deal will ultimately fall through. In the process of making an acquisition offer that Core Scientific shareholders are clearly unwilling to accept, CoreWeave has ultimately dragged down its own valuation.

For a company riding the wave of artificial intelligence, such an outcome is clearly not wise