Oracle’s stock has faced significant headwinds in recent months, with shares plummeting nearly 30% this quarter. This downturn marks the sharpest decline since 2001, a period still reverberating from the dot-com bust. Investors are expressing growing skepticism about the database software giant’s capacity to scale its data center infrastructure to meet the demands of OpenAI, the driving force behind ChatGPT. The ambitious agreement, struck in September, stipulates that OpenAI will invest over $300 billion with Oracle.
The market’s unease was amplified by Oracle’s recent quarterly earnings report, which revealed weaker-than-expected revenue and free cash flow. In a notable shift, new finance chief Doug Kehring projected fiscal year 2026 capital expenditures of $50 billion, a substantial 43% increase from the September forecast and double the expenditure from the previous year. Furthermore, Oracle is allocating $248 billion towards leases to bolster its cloud capacity, in addition to the ongoing construction of new data centers.
This aggressive expansion strategy necessitates a significant influx of capital. In September, Oracle secured $18 billion through a jumbo bond sale, one of the largest debt issuances in the tech sector’s history. While Kehring has pledged to maintain Oracle’s investment-grade debt rating, some investors remain unconvinced. This sentiment is reflected in the rising prices of Oracle’s credit default swaps, a financial instrument used to hedge against default risk. Analysts at DA Davidson noted in a December 12th research note that “Considering Oracle is already barely hanging on to an investment grade rating, we would be concerned about Oracle’s ability to live up to these obligations without restructuring its OpenAI contract.” The firm currently holds a neutral rating on the stock. Oracle declined to comment on the matter.
The tenure of new co-CEOs Clay Magouyrk and Mike Sicilia began amidst a period of considerable optimism. Just two weeks prior to their assuming leadership from Safra Catz, Oracle announced a staggering 359% increase in its revenue backlog, largely attributed to OpenAI’s commitment. This deal represented a significant validation for Oracle, particularly after it was notably absent from Gartner’s list of the top five cloud infrastructure providers by revenue for 2024.
Following the news of the OpenAI agreement on September 10th, Oracle’s stock surged by nearly 36%, marking its third-largest rally since its 1986 IPO, with shares reaching an intraday record of $345.72. Zachary Lountzis, vice president at Lountzis Asset Management, recalled in an interview, “We think $340 was terrifying.” Lountzis’s firm held approximately $25 million in Oracle shares as of September 30th.
However, the stock has since retraced 43% of its value, closing recently at $197.49. The stock did experience a modest boost last Friday after TikTok announced an agreement to sell a portion of its U.S. business to Oracle and other investors, a development that builds on Oracle’s long-standing role in providing cloud services to TikTok.
**Not ‘Betting Against Larry’**
Lountzis shared that his team first invested in Oracle in 2020, when the stock was trading below $60. They have maintained their position through the recent market fluctuations, even acquiring an additional 30,000 shares in the first quarter of this year. “Our philosophy is that we’re okay with short-term over-valuation if the economics of the business have not changed, and that was the case with Oracle,” Lountzis explained. “We didn’t feel the economics of the business changed with all the largely positive news that came out. And I think what we’ve seen from $340 down to $180 is actually a very healthy correction.”
A significant factor in Lountzis’s continued confidence in the company is the influence of Larry Ellison, Oracle’s founder and currently the world’s second-richest individual, according to Bloomberg. “You would have gone bankrupt 40 times betting against Larry over the last 50 years,” Lountzis remarked. “He sees the future.”
In October, Sicilia, Magouyrk, and Kehring articulated a vision for accelerated growth at Oracle, projecting revenues to climb to $225 billion by fiscal year 2030, a substantial leap from $57 billion in fiscal year 2025. The primary engine for this expansion is expected to be AI infrastructure, heavily reliant on the GPUs manufactured by Nvidia.
However, this ambitious growth trajectory could come at the expense of Oracle’s profitability. While Magouyrk spoke of “hypergrowth” to analysts, the expansion into AI infrastructure, which carries lower margins than Oracle’s core software business, could impact overall profitability. In fiscal year 2021, Oracle reported a gross margin of 77%. Analysts polled by FactSet anticipate this figure to decline to approximately 49% by 2030. Furthermore, the company is projected to incur around $34 billion in total negative free cash flow over the next five years, with a turnaround expected in 2029.
Eric Lynch, managing director at Suncoast Equity Management, expressed reservations about Oracle’s strategic pivot from an investor’s perspective. “Four or five years is a long time,” Lynch stated. “That’s just not within our investment discipline.” He also voiced concerns about Oracle’s heavy reliance on OpenAI, a company known for its rapid cash burn and its commitment to over $1.4 trillion in AI buildouts and investments. “Will the demand be there from OpenAI?” Lynch questioned.
Michael Turrin, an analyst at Wells Fargo, initiated coverage of Oracle this month with a buy rating and a $280 price target. He believes that the industry’s perception of Oracle will likely improve if the company successfully executes its strategy with OpenAI, which he estimates could account for over one-third of Oracle’s revenue by 2029. “They’re kind of shifting away from more of a value-oriented business to a more growth-oriented business,” Turrin commented.
A significant challenge for Oracle remains gaining market share in the cloud infrastructure sector, where it trails behind Amazon, Microsoft, and Google. Despite this, Oracle’s customer base includes prominent names like Meta, Uber, and Elon Musk’s xAI.
Databricks, recently valued at $134 billion in a funding round, does not currently offer its popular data processing software on Oracle’s cloud. Databricks CEO Ali Ghodsi remarked in an interview, “That will happen when customers start banging on my door, saying, ‘You need to run on Oracle.’ Maybe it’s getting there, but we just haven’t heard that.” Snowflake, a competitor to Databricks, has also not extended its services to Oracle’s platform.
Turrin suggests that Oracle’s market credibility will ultimately depend on the success of its AI infrastructure buildout. “Then customers start to look at this and say, wow, this company was trusted to build some of the largest training clusters in the world, and they’re delivering on them,” Turrin said. “We should take a look at that too and figure out what’s happening here.”
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