CoreWeave bulls are celebrating a new customer win, but bearish positions have built up and the company is still losing money

Shares of CoreWeave Inc. soared 143% over the past month, and they're up 25% this week alone. On the surface, investors seem to be expressing optimism over the company's better-than-expected earnings, latest customer acquisition of Google and upsized debt deal. But the stock is also a prime candidate for a short squeeze, given how crowded bearish positions have become in recent weeks.

CoreWeave Inc, which went public on March 28, already has an impressive lineup of lineup of data-center-infrastructure customers, including Microsoft Corp. $(MSFT)$, OpenAI and now Alphabet Inc.'s Google $(GOOGL)$ $(GOOG)$. Despite that, short positions continue to build up. Based on data from S3 Partners, 6.7 million shares had been shorted over the last 30 days, leading to an over 104% increase in total shares shorted. Ihor Dusaniwsky, managing director at S3 Partners, noted that existing shorts are paying a fee of about 17%. New shorts are paying between 20% to 30%, making it an expensive position to hold.

Below is a chart that shows how steeply short interest as a percentage of the stock's float rose from April 15 to May 20.

Line graph showing CoreWeave's short interest as a percentage of float from April to May.

While investor optimism sent the stock's price rallying, there are positions on the other side of the trade. Dusaniwsky noted that it's a crowded stock that's now "very squeezable" with a "squeeze" score of 100, the highest score on a scale from zero to 100.

"In 999 instances out of 1,000 situations, if you told me that Google and OpenAI signed up as customers and Nvidia was a shareholder, that would be a good thing," said Gil Luria, head of technology research at D.A. Davidson. "So I definitely understand how the stock got this high. What we're arguing is that this is the one in 1,000, where those things are actually, not very good."

In other words, investors who took short positions had good reason to do so. Luria noted that the big issue with CoreWeave is that its borrowing costs are too high. He estimated that the company's return on assets, which measures how efficiently a company uses its assets to generate profit, is at 5%, while the interest the company is paying on the debt to purchase some of those assets is more than 10%.

In the short term, that may be acceptable for a smaller company that's spending money to ramp up its business. But it's not great news for CoreWeave. The business isn't a small one at this point, he noted. CoreWeave is expected to generate more than $5 billion in revenue this year and the company already has over 30 data centers in operation. So if CoreWeave isn't already able to make money at this point, it's hard to imagine it will be able to down the line, he said. The company reported a first-quarter adjusted net loss of $150 million, compared with $24 million a year ago.

This is especially the case when considering that CoreWeave's customers are also its direct competitors and are using its cloud storage as excess capacity when they're tight on internal capacity, Luria noted. This means they're not expected to be long-term customers because they can walk away once they have increased their capacity, in his view.