AI Sentiment Wanes: Wall Street Cools on Oracle Buildout Plans

Two months ago, Oracle’s stock experienced its most significant single-day gain since 1992, surging 36% to a record high after the company unveiled a bullish forecast for its cloud infrastructure revenue. This surge reflected investor optimism surrounding Oracle’s deepening partnership with OpenAI and its potential to capitalize on the burgeoning AI market.

However, the market’s sentiment has since shifted, with Oracle relinquishing a substantial portion of those gains. As of mid-November, the stock is on track for its worst monthly performance in over a decade, raising concerns about whether the initial AI hype was excessive and whether OpenAI’s ambitious commitment of $300 billion to Oracle over five years is sustainable.

“AI sentiment is waning,” noted Jackson Ader, an analyst at KeyBanc Capital Markets, highlighting the growing unease among investors. This cooling sentiment is attributed to concerns about the capital intensity of the AI buildout and the potential for overvaluation in the sector.

Ader further pointed out that among the major cloud providers involved in the GPU business, Oracle is projected to generate the least free cash flow. This raises questions about the company’s ability to self-finance its aggressive expansion plans and may necessitate reliance on more unconventional financing strategies.

Indeed, Oracle is reportedly considering raising $38 billion in debt to fuel its AI infrastructure development, according to sources familiar with the matter. This substantial debt raise underscores the significant capital expenditure required to support Oracle’s partnership with OpenAI and its broader AI ambitions. Bloomberg previously reported on the planned debt raise.

Oracle’s capital-intensive AI strategy involves collaborating with partners to establish and lease data centers across Texas, New Mexico, and Wisconsin. Simultaneously, the company is procuring substantial quantities of GPUs from Nvidia and Advanced Micro Devices to power its AI models, reflecting the intense competition for AI-enabling hardware.

At Oracle’s AI World conference in October, the company showcased its cloud infrastructure design, emphasizing its scalability and adaptability. While initial investor enthusiasm was fueled by Oracle’s substantial backlog of signed contracts exceeding $450 billion, skepticism began to emerge shortly thereafter.

Oracle’s shares experienced a 7% drop on October 17th, driven by analysts questioning the feasibility of the company’s ambitious long-term financial targets. Oracle projected reaching $166 billion in cloud infrastructure revenue by fiscal year 2030, a significant leap from the $18 billion projected for fiscal year 2026. This ambitious growth trajectory has raised eyebrows among investors who are scrutinizing the underlying assumptions and execution risks.

Oracle’s upcoming quarterly earnings report, scheduled for mid-December, will be closely monitored by investors seeking clarity on the company’s progress towards these targets and the overall health of its AI-driven growth strategy.

Andrew Keches, an analyst at Barclays, suggested off-balance sheet debt facilities and vendor financing as potential options for Oracle to bridge its funding gap. Keches recently downgraded Oracle’s debt rating, citing the company’s “significant funding needs.”

“We struggle to see an avenue for ORCL’s credit trajectory to improve,” Keches wrote in a note to clients, reflecting the growing concerns about Oracle’s financial leverage and its ability to navigate the capital-intensive AI landscape.

Despite the headwinds, Oracle bulls maintain a positive outlook, citing founder Larry Ellison’s proven track record of innovation and strategic execution. One hedge fund manager, speaking anonymously, emphasized Ellison’s ability to deliver and cautioned against underestimating him.

Rishi Jaluria, an analyst at RBC Capital Markets, echoed this sentiment, suggesting that Oracle could regain momentum through further AI deals. However, Jaluria currently maintains a hold rating on the stock, indicating a neutral stance pending further developments.

In a sign of increasing investor caution, Oracle’s 5-year credit default swaps have climbed to a two-year high. While not yet alarming, this trend warrants attention as credit default swaps act as insurance for investors against potential debt defaults.

Barclays has recommended that clients purchase Oracle’s 5-year credit default swaps, suggesting a more conservative approach to managing risk exposure.

Last month, Oracle CEO Clay Magouyrk addressed concerns about OpenAI’s ability to fulfill its $60 billion annual payment commitment to Oracle. Magouyrk confidently stated, “of course,” emphasizing OpenAI’s growth potential and rapid user base expansion.

OpenAI CEO Sam Altman projected that the company will exceed $20 billion in annualized revenue this year and reach hundreds of billions of dollars by 2030. These ambitious projections are crucial for justifying OpenAI’s substantial investment in Oracle’s infrastructure.

Gil Luria, an analyst at D.A. Davidson, offered a more critical perspective, labeling Oracle as an example of “bad behavior in the AI buildout.” He contrasted Oracle with Microsoft, Amazon, and Google, which he believes possess the necessary cash reserves and customer demand to support their rapid AI expansions.

Luria argued that Oracle’s overreliance on OpenAI, a company still in the early stages of profitability, poses a significant risk. Furthermore, he noted that the gross margins associated with renting out GPUs are significantly lower than Oracle’s traditional core business margins of approximately 80%. Luria maintains a hold rating on the stock, expressing reservations about Oracle’s AI strategy.

Luria concluded that the $100 stock appreciation that followed Oracle’s previous earnings report has justifiably evaporated, reflecting the market’s reassessment of the company’s AI prospects and the associated risks.