Neocloud leader CoreWeave plunges by double digits... ‘Bubble puts’

[Financial News]  

Nvidia-backed neocloud leader CoreWeave plunged by double digits on the 14th (local time), pouring cold water on the artificial intelligence (AI) theme.
Put-option trading surged in the options market as investors bet on a further decline in CoreWeave shares.
As CoreWeave plunged, rival neocloud stocks such as Nebius, Lumentum and IREN also tumbled.
The trigger was a stronger outlook for another interest-rate hike by the Federal Reserve (Fed) this month, after the September Consumer Price Index (CPI) released that day by the U.S. Department of Labor showed sharp inflation driven by the war in Iran. Concerns that this would intensify cost pressures on neocloud companies, which raise massive amounts of outside capital and pour it into large-scale AI data-center infrastructure, also weighed on the market.

A Financial Times (FT) report that CoreWeave was exposed to five key risks also deepened the stock plunge.
According to the FT, CoreWeave faces five key risks: excessive debt, risk of financial distress, persistently negative free cash flow (FCF), its corporate bonds sinking to junk-bond status, and concerns over Nvidia’s circular investment.
As of the end of June, its debt and lease obligations totaled about $52 billion, while second-quarter interest expenses alone soared to $640 million, more than double the year-earlier figure. CoreWeave also leases data centers on a long-term basis but has shorter contracts with customers. If an oversupply of AI servers emerges, customers may not renew their contracts, leaving the company facing a severe deterioration in its finances.
CoreWeave has also raised funds using contracts with creditworthy big tech companies such as Meta Platforms and Microsoft (MS) as collateral. Having reached the limits of that approach, it is considering loans backed by contracts with lower-rated, highly volatile AI startups and research institutes. If the AI boom cools, this could lead to a cascade of defaults.
Its massive losses are also a burden.
According to Visible Alpha, the market expects CoreWeave’s FCF to come in at about negative $25 billion this year, negative $28 billion next year and negative $18 billion in 2028. The company is caught in a vicious cycle of taking on huge debts to invest while operating at a loss in order to stay competitive.
Meanwhile, bond investors are shunning CoreWeave’s corporate bonds. The yield on its unsecured bonds maturing in 2032 has risen 1.5 percentage points in a week and recently approached 15%. That is junk-bond territory.
Standard & Poor’s (S&P) and other major credit-rating agencies classify CoreWeave’s financial risk as “aggressive.” This is the fifth of six levels, a stage at which excessive debt and interest burdens mean the risk of default can surge in the event of an external shock. The highest risk rating is “highly leveraged,” assigned to companies effectively at the breaking point. CoreWeave’s level-five rating means its default risk is high.
CoreWeave also faces the risks of excessive dependence on Nvidia and circular investment. Nvidia has provided substantial support, including more than $2 billion in equity investment in CoreWeave and purchase guarantees worth $6.3 billion. This means CoreWeave could be seriously hurt if AI demand falls or cracks emerge in the Nvidia-centered ecosystem.
Amid these concerns, CoreWeave’s three founders sold shares worth about $2 billion this year.

Options trading in CoreWeave has surged.
According to CNBC, CoreWeave’s options trading volume that day was more than seven times its average for the previous 30 days. Nebius, a data-center infrastructure-related stock, saw nearly four times its average volume, while IREN’s was twice its average.
Put options betting on a price decline dominated trading in CoreWeave, while calls anticipating a price rise were more numerous for Nebius and IREN. However, those trades were also driven by call-option selling, confirming that the outlook was bearish.
For CoreWeave, call-option buying totaled 106,000 contracts, while put options came close to 200,000—nearly twice as many.
Scott Bauer, CEO of Chicago Prosper Trading Academy, said, “This is a bubble put,” and pointed out, “It’s not simply a cheap option bought with the buyer prepared to see it go to zero if the stock price skyrockets.” In other words, someone who believes that neocloud companies, now a symbol of the AI trade, are surrounded by a massive bubble has made a bold bet to hedge against the bubble bursting or losses on related holdings.
[email protected] Song Gyeong-jae Reporter