Key Takeaways
- Oracle’s stock has plunged since hitting an all-time high in September as the company has become a poster child for growing investor concerns that an AI bubble has formed.
- The company is enmeshed in the web of deals linking different parts of the AI complex together, which means that its pain could be felt by others.
Betting big on artificial intelligence is proving to be a double-edged sword.
Shares of Oracle (ORCL), the almost-50 year-old software company turned AI play, rallied furiously during the summer as investor enthusiasm for what could be the next transformative technology surged. Lately the company’s stock has given up much of those gains, down more than 40% from its all-time high in September, more than other related plays including Meta Platforms (META), Palantir Technologies (PLTR) and Advanced Micro Devices (AMD), whose stocks declined at least 20% from their respective peaks. Now investors are looking at Oracle as the poster child for AI-related excess.
Though concerns about AI valuations have been lingering for years, investors have recently started to pan stocks tied to the theme, weighing the amount companies are spending to develop the tech against the potential for future revenue.
Oracle has come under increased scrutiny since it raised $18 billion in new debt last month to fund its infrastructure buildout, pushing its overall debt to over $100 billion. In January, Oracle announced that it was joining forces with ChatGPT maker OpenAI and Japanese tech giant Softbank on a $500 billion project, called Stargate, to develop AI infrastructure in the U.S.
Why This Matters to Investors
It’s become increasingly difficult to view AI-related businesses in a vacuum, because of the relationships they’ve created between each other with multi-billion dollar deals. In that way Oracle’s hurt could turn into pain for others.
Oracle’s quarterly earnings report in early September blew past Wall Street expectations, sending the stock soaring 36% in one day and briefly making co-founder and Executive Chairman Larry Ellison the world’s richest person. A few weeks later, however, the company announced that longtime CEO Safra Catz would be replaced as CEO, and the stock has been declining ever since.
Meanwhile, traders have started to pile into Oracle’s credit-default swaps as a way to both hedge and bet against the AI trade, according to a recently published story by Bloomberg. Credit default swaps are derivative contracts that serve as a kind of insurance against the possibility that a borrower will default on its debt obligations.
Consensus capital expenditures for AI hyperscalers, including Amazon (AMZN), Google (GOOGL), Meta, Microsoft (MSFT) and Oracle have risen to $533 billion now from $467 billion at the start of the third-quarter earnings season, according to Goldman Sachs.
Oracle is also a major part of the web of deals between AI software makers, chip companies and cloud operators, whose circular deals—possibly indicating more self-dealing than representative of organic demand—have raised eyebrows. The Wall Street Journal reported that a large chunk of the outsize revenue backlog unveiled in its September earnings report was from an OpenAI deal.
“The feedback loops created by the revenue and equity relationships between some of the largest U.S. public companies and smaller AI firms increase the risk that stress in one part of the AI ecosystem affects investors across the AI complex,” Goldman analysts led by Ryan Hammond said in a report published earlier this week.
