In Austin Powers: International Man of Mystery, a Virtuocon guard famously stands in front of a commandeered steamroller, screaming "No!!" three times before being run over. The joke, of course, is that the hazard moved so slowly he had ample time to step out of the way.
For months, equity traders holding CoreWeave (CRWV) have played that guard. Despite credit markets flashing warnings, equity holders essentially just stood there. Now, after a shocking 27.5% drop from last Friday's close to this Thursday morning's 52-week lows, followed by a whiplash 17% rebound, equity investors, if not squashed like Dr. Evil's henchman, are dazed and confused. Shares are down another 5% today.
With earnings just a few weeks away, massive leverage, a heavily split sell-side, and 15.4% short interest, the stock remains primed for explosive volatility.
The credit market slow moving steamroller
The hazard approaching CRWV equity wasn't hidden. The AI cloud infrastructure platform essentially didn't exist five years ago and has accumulated $51.6 billion in debt (~$46 billion net of cash) against a backdrop of zero historical profitability. That was well known, but the CEO's comments that the company aspired to be investment grade so it could borrow "unlimited sums", even as investors already anticipated nearly another $60 billion in debt in the next 18months, spooked folks. (Trick or Treat!) Especially since the debt issued only in June had already fallen 20% since.
From an options trader's point of view, it was hard to reconcile deteriorating credit and rising leverage with falling options premia; as recently as last week, they were in the 6th percentile, 1.5 standard deviations below the one-year mean. At 72%, options weren't cheap in absolute terms, but given everything going on, they should have been higher. The stock also looked somewhat complacent, with the equity chopping around historical support levels dating back to May 2025. The credit side was on tilt:
- Bond Swoon: Bonds issued at par just this past June at an 8.5% rate fell nearly 18% through last Friday, following a severe initial swoon in late July.
- CDS Spikes: 5-year Credit Default Swaps (CDS) exploded from 452 bps in early June to over 1100 bps this week, implying a roughly 60% probability of default within the next five years.
- Cash Flow Burn: The company faces an estimated $16.45 billion in negative free cash flow in the second half of this year alone, and another $30.6 billion in FY2027, according to Bloomberg
- Cost of Capital: With a 15% cost of capital, the structural hurdle rate for new business is staggering. Even with optimistic pricing power through 2028, forecast Debt/EBITDA at FYE2028 sits at 4.5x, which warrants caution, and only if the company hits all those ambitious numbers.
Because CRWV is levered by more than 2:1, a 10% move in enterprise value translates to a nearly 22% swing in equity value.
The sell-side tug of war
Despite the dire credit picture, equity sentiment remains fiercely divided, driving this week's 17% bounce from the lows. For example, HSBC maintains a Sell rating with a $39 price target, essentially calling for the stock to be cut in half. Conversely, banks like BNP and Cantor Fitzgerald (my former employer) suggest these fears are overblown and the stock should more than double from here.
It's not just bankers defending the company either. Nvidia CEO Jensen Huang downplayed systemic concerns, and ARK Investment stepped in to buy 192,000 shares. BofA argues that CRWV's ability to bring active power online at scale, combined with higher pricing from Nvidia's upcoming Vera Rubin deployments, will drive faster-than-expected revenue growth. They described execution risk as a bigger concern than financing; I'm not sure those who bought the 2032 8 1/2s at par would agree.
The Trade: November 80/January 72.5 call diagonal
With CRWV's credit heavily distressed but its equity heavily defended by high-profile dip-buyers, going outright long or short into earnings carries excessive directional risk. A November/January Call Diagonal, currently trading for just under $6 per spread. Almost 9% of the current stock price. Normally, that's a lot, but given this stock has fallen 27.5% and then gained 17% in the past 5 sessions, it isn't.
Structure Mechanics:
- Buy the January 72.5 Calls pay $10.25
- Sell the November 80 Calls @ $4.30
Disclosures: Tidal owns/holds all the securities mentioned in the article.
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