In Austin Powers: International Man of Mystery, Virtuocon’s security guard famously stands in front of a stolen steamroller and yells, “No!” 3 times before getting run over. The joke, of course, is that the danger moved so slowly that he had plenty of time to get it out of the way.
For several months, stock traders Coreweave (CRWV) I have served as one of its guards. Stockholders essentially stood there, despite the credit markets’ warnings. Now, after a shocking 27.5% drop from last Friday’s close to this Thursday morning’s 52-week low, followed by a whiplash 17% rebound, stock investors are stunned and confused, if not crushed like Dr. Evil’s henchmen. The stock price fell another 5% today.
With earnings just weeks away, the stock remains subject to explosive volatility due to massive leverage, a highly divided sell-side, and 15.4% short interest.
Credit market movements are slow
The dangers looming over CRWV’s capital were not hidden. The AI cloud infrastructure platform essentially didn’t exist five years ago and has accumulated $51.6 billion in debt (about $46 billion net of cash) on the back of zero historical profitability. This was well known, but the CEO’s comments that the company was aiming for investment grade status so it could borrow an “unlimited amount” took everyone by surprise, even though investors were already expecting the company to take on nearly $60 billion more in debt over the next 18 months. (Trick-or-treat!) Notably, the bonds, which were only issued in June, had already fallen 20% since then.
From an options trader’s perspective, it has been difficult to reconcile the deterioration in credit, the rise in leverage, and the decline in option premiums. Just last week, they were in the 6th percentile, 1.5 standard deviations below the one-year average. At 72%, the option was not cheap in absolute terms, but considering all the circumstances, the option should have been higher. The stock also looked a bit complacent, with the stock trading lower around historic support levels dating back to May 2025. Credit was on the decline.
Bond swoon: Issued just this past June at a par value of 8.5%, the bond suffered a severe initial swoon in late July and was down nearly 18% by last Friday. CDS soars: Five-year credit default swaps (CDS) exploded from 452 bps in early June to more than 1100 bps this week. This suggests an approximately 60% chance of default within the next five years. Cash Flow Burn: The company faces an estimated amount of debt default. Free cash flow was negative $16.45 billion in the second half of this year alone, and is expected to be negative another $30.6 billion in fiscal 2027, according to Bloomberg. Cost of Capital: With a cost of capital of 15%, the structural hurdle rate for new business is staggering. Even with optimistic pricing power through 2028, FY2028 projected debt/EBITDA is only 4.5x, which is only if the company hits all of these ambitious numbers, which is something to keep in mind.
Because CRWV is leveraged at a ratio of over 2:1, a 10% change in enterprise value corresponds to almost a 22% change in stock value.
seller’s tug of war
Despite dire credit conditions, stock market sentiment remains sharply divided, leading to a 17% rebound from this week’s lows. For example, HSBC maintains a sell rating with a price target of $39, effectively calling for the stock to be cut in half. Conversely, banks like BNP and Cantor Fitzgerald (my former employer) have suggested that these fears are overblown and that their share prices should more than double in the future.
Bankers aren’t the only ones protecting companies. Nvidia CEO Jensen Huang downplayed systemic concerns, and ARK Investment went ahead with the purchase of 192,000 shares. BofA claims CRWV’s ability to bring active power online at scale and the increased pricing from Nvidia’s upcoming Vera Rubin deployment will drive better-than-expected revenue growth. They explained that execution risk is a bigger concern than funding. I’m not sure if people who bought 2032 8 1/2 at face value would agree.
Trade: November 80/January 72.5 Cole Diagonal
Although CRWV’s credibility has deteriorated significantly, the stock is heavily guarded by prominent push buyers, and going outright long or short for profits carries undue directional risk. The November/January call diagonal is currently trading at just under $6 per spread. That’s nearly 9% of the current stock price. Normally, this would be a significant amount, but not considering the stock is down 27.5% over the past five sessions and has since risen 17%.
Structural mechanics:
Buy the January 72.5 call for $10.25 Sell the November 80 call for $4.30
Disclosure: Tidal owns/holds all securities mentioned in the article.
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