Oracle stock on pace for worst quarter since 2001, AI concerns

three months ago Seer Named Clay Magouyrk and Mike Sicilia as its new CEOs. They’re off to a rough start.

Oracle shares are down 30% so far this quarter. With four trading days left in the period, the stock is on track for its steepest decline since 2001 and the dot-com crash.

Investors have become skeptical about the database software vendor’s ability to roll out more server farms for ChatGPT operator OpenAI, which agreed to spend more than $300 billion with Oracle in September.

Earlier this month, Oracle reported quarterly revenue and free cash flow were weaker than expected. On the earnings call, newly appointed finance leader Doug Kehring called for $50 billion in fiscal 2026 capital spending; this was 43% higher than September’s plan and double the previous year’s total. Additionally, Oracle is planning $248 billion in leases to increase cloud capacity as well as build data centers.

Such growth will require boatloads of debt. Oracle in September $18 billion in a jumbo bond sale, one of the largest debt issuances in the tech industry. Kehring stuck to his earnings call call to maintain Oracle’s investment-grade debt rating. But some skeptical investors argue otherwise, driving up the prices of Oracle’s credit default swaps.

“Given Oracle’s current poor hold on an investment grade rating, we would be concerned about whether Oracle can meet these obligations without restructuring its OpenAI contract,” analysts at DA Davidson said in a Dec. 12 note to clients. They have the equivalent of a hold rating on the stock.

Oracle declined to comment.

Magouyrk and Sicilia’s tenure began at a time of historic optimism.

About two weeks before taking the reins from Safra Catz, Oracle reported a 359% revenue backlog, largely due to OpenAI’s commitment. Deal that represented a big boost for Oracle but was canceled Gartner’s list It is among the top five cloud infrastructure providers according to 2024 revenues.

Following reports of the OpenAI deal on September 10, Oracle’s shares rose nearly 36%, marking the third steepest rise since the company’s IPO in 1986. Shares reached an intraday record of $345.72.

“We think $340 is terrible,” Zachary Lountzis, vice president of Lountzis Asset Management, said in an interview. Lountzis owned $25 million worth of Oracle stock as of Sept. 30, according to a report. filing.

The stock has since lost 43% of its value and closed at $197.49 on Wednesday, but rose last Friday after TikTok announced it had agreed to sell part of its US business to Oracle and other investors. Oracle has been providing cloud services to TikTok for years.

Lountzis said his team first bought Oracle shares in 2020, when the stock was below $60. It held shares at recent highs and lows and bought about 30,000 more shares in the first quarter of this year.

“Our philosophy is that short-term overvaluation is OK if the economics of the business haven’t changed, which was the case at Oracle,” Lountzis said. he said. “We haven’t felt like the economics of the business have changed because of the largely positive news that’s come out. And I think what we’re seeing from $340 to $180 is actually a very healthy correction.”

According to Lountzis, much of his confidence in the company comes down to: Larry Ellison, who founded Oracle in 1977, is now the second richest person in the world. Bloomberg.

“You would have gone bankrupt 40 times in the last 50 years betting against Larry,” Lountzis said. “He sees the future.”

In October, Sicilia, Magouyrk and Kehring laid out a vision for Oracle to grow much faster, with revenue rising from $57 billion in fiscal 2025 to $225 billion in fiscal 2030. Much of this growth will come from artificial intelligence infrastructure. Nvidia’s At its center are the graphics processing units.

But while Magouryk told analysts to prepare for “hyper growth,” such expansion would come at the expense of profitability, as Oracle’s core software business has much higher margins.

In fiscal 2021, Oracle’s gross margin was 77%. Analysts polled by FactSet predict that figure will drop to about 49% in 2030, totaling about $34 billion in negative free cash flow over the next five years before that figure turns positive in 2029.

Eric Lynch, managing director of Suncoast Equity Management in Florida, said it was difficult as an investor to adjust to Oracle’s plans.

“Four or five years is a long time,” Lynch said. “This is not within our investment discipline.”

Lynch also said he was concerned about such heavy reliance on OpenAI, which is burning through cash at a rapid rate and has committed over $1.4 trillion in total AI development and investments.

“Will there be a demand from OpenAI?” Lynch said.

Wells Fargo analyst Michael Turrin initiated coverage of Oracle earlier this month with the equivalent of a buy rating and a $280 price target. Industry perception will likely improve if Oracle continues with OpenAI, which could account for more than a third of the company’s revenue by 2029, Turrin predicted.

“They are shifting from a more value-oriented business to a more growth-oriented business,” Turrin said. he said.

Increasing market share in cloud infrastructure, where the company lags badly, remains a big challenge for Oracle Amazon, Microsoft and although Google’s customer list includes the following names: Meta, Uber and Elon Musk’s xAI.

Databricks, which was valued at $134 billion in a financing round, does not make its popular data processing software available on Oracle’s cloud.

“When customers start knocking on my door saying, ‘You need to run Oracle,’ it’s going to happen,” Databricks CEO Ali Ghodsi said in an interview. “Maybe it’s getting there, but we haven’t heard of it yet.”

Databricks rival Snowflake nor did it bring its services to Oracle.

Turrin said Oracle’s credibility in the market will depend on the success of its artificial intelligence structure.

“Then customers start looking at this and wow, this company has been trusted to build some of the largest training stacks in the world, and they deliver,” Turrin says. “We need to take a look at this as well and figure out what’s going on here.”

WRISTWATCH: How is the massive power draw of generative AI overloading our grid?