In "Austin Powers: The Spy Who Shagged Me," a Virtuocon guard stands in front of a hijacked bulldozer and shouts "No!" three times before being run over. The humor lies in the fact that the danger is moving so slowly that he had plenty of time to get out of the way.
Over the past few months, stock traders holding CoreWeave (CRWV) have been like that guard—despite continuous warnings from the credit markets, shareholders largely stood still. Now, after plunging 27.5% from last Friday’s close to early Thursday’s 52-week low, only to quickly rebound 17%, investors are either thoroughly shaken or barely hanging on—not quite crushed like Dr. Evil’s henchmen, but certainly disoriented. The stock fell another 5% today.
With earnings just weeks away, high leverage, sharply divided sell-side opinions, and a short interest of 15.4%, this stock remains primed for significant volatility.
The slow-moving bulldozer of the credit market
The risks surrounding CRWV stock are not hidden. This AI cloud infrastructure platform barely existed five years ago and has accumulated $51.6 billion in debt (approximately $46 billion net of cash) without a history of profitability. This has long been known, but the CEO previously stated the company aims to achieve an investment-grade rating to access “unlimited funding,” while investors already anticipated the company would add nearly $60 billion in additional debt over the next 18 months—causing market unease. (Trick or treat!) This is especially concerning given that bonds issued by the company just in June have already declined 20% from their issue price.
From an options trader’s perspective, deteriorating credit conditions and rising leverage are difficult to reconcile with declining option premiums; just last week, option premiums were at the 6th percentile, 1.5 standard deviations below the one-year average. At 72%, the absolute price of options is not cheap, but given current conditions, they should be higher. The underlying stocks also appear lethargic, oscillating near historical support levels established since May 2025. Credit markets, meanwhile, are clearly under pressure:
- Bond plunge: Bonds issued at par in June this year with an 8.5% coupon fell nearly 18% below par before last Friday, following a significant drop in late July.
- CDS surges: The 5-year credit default swap (CDS) has surged from 452 basis points in early June to over 1,100 basis points this week, implying a roughly 60% probability of default over the next five years.
- Cash flow consumption: According to Bloomberg, the company faces a negative free cash flow of $16.45 billion in the second half of this year alone, with an additional $30.6 billion expected to be consumed in fiscal year 2027.
- Cost of capital: At a 15% cost of capital, the structural barriers to entry for the new business are remarkably high. Even under optimistic pricing assumptions through 2028, the debt/EBITDA ratio is projected to reach 4.5x by the end of fiscal 2028—a level that warrants caution, assuming the company fully achieves all its ambitious targets.
Due to CRWV's leverage ratio exceeding 2:1, a 10% change in enterprise value results in approximately a 22% fluctuation in equity value.
The tug-of-war between seller perspectives
Despite a bleak credit outlook, stock sentiment remains sharply divided, driving a 17% rebound from this week’s lows. For example, HSBC maintains a “Sell” rating with a $39 price target, essentially implying the stock could halve. In contrast, banks such as BNP and Cantor Fitzgerald (the author’s former employer) believe these concerns are overstated and that the stock should more than double from current levels.
It’s not just investment banks defending the company. NVIDIA CEO Jensen Huang downplayed systemic concerns, while ARK Investment purchased 192,000 shares. Bank of America believes that CRWV’s ability to scale up active power, combined with higher pricing from NVIDIA’s upcoming Vera Rubin deployment, will drive revenue growth faster than expected. They consider execution risk more concerning than financing risk; however, holders of the 2032 8.5% bonds purchased at par may disagree.
Trading idea: November/January 80/72.5 call spread
Given that CRWV’s creditworthiness has been severely damaged, but its stock is being strongly supported by well-known value buyers, taking a direct long or short position ahead of the earnings report carries excessive directional risk. The author recommends a November/January call spread, currently trading at just under $6 per spread—approximately 9% of the current stock price. While this is typically not considered cheap, given that the stock has dropped 27.5% and then rebounded 17% over the past five trading days, this price is not unreasonable.
Structural details:
- Buy the January-expiring $72.5 call option for $10.25
- Sell the November 80 USD call option and collect $4.30.
Disclosure: Tidal holds all the securities mentioned in this article.
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