:max_bytes(150000):strip_icc()/GettyImages-2234722680-f07161cfecb14590b6c4b496887a0b24.jpg "Oracle Stock Is Getting Whacked. Is the AI Trade a ‘Show Me Story’ Now?")
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Key Takeaways
- Oracle and other AI stocks tumbled on Thursday after the company reported surging expenditures related to its AI data center buildout, reinforcing concerns on Wall Street about out-of-control, debt-fueled spending on the fledgling technology.
- The pressure on Oracle’s shares may signal increasing investor reluctance to assume the best outcomes from AI even for big tech companies that say AI business is powering big revenue growth.
What happens when investors start turning a microscope on promises of AI-driven gold?
That question was hammering AI stocks on Thursday after tech giant Oracle (ORCL) last night reported results that did little to resolve Wall Street’s concerns about an AI bubble inflated by debt-laden investments. The answer wasn’t pretty: Oracle’s shares—which which doubled in value between January and early September—were down nearly 15% in recent trading, touching six-month lows.
Oracle wasn’t the only AI-powered stock to feel the pressure today. Nvidia (NVDA), Palantir (PLTR), and Broadcom (AVGO) were all down more than 3% in recent trading. Roundhill’s Magnificent 7 ETF, or MAGS, was off a bit less than 1% while the S&P 500 treaded water and the blue-chip Dow industrials climbed.
The market’s reaction to Oracle’s earnings could reflect a growing desire among investors to be shown, not told of, AI’s commercial benefits. “Investors are no longer rewarding AI narratives without proof of execution,” said Shay Boloor, Chief Market Strategist at Futurum Equities, in an interview.
Why This Is Important
Oracle isn’t expected to start realizing much of its AI-related revenue until next year. For that reason, Oracle stock’s performance in recent months has been driven primarily by Wall Street’s optimism—and pessimism—about the outlook for the business of AI. Today, pessimism was the driving force behind its shares.
Oracle shocked Wall Street with its fiscal first quarter earnings report in September, when the company said its backlog grew more than $300 billion, sending its shares 36% higher in a single day and briefly making Larry Ellison the world’s richest person—and the company a poster child for the tech boom. The company on Wednesday said its backlog increased nearly $70 billion last quarter to $523 billion.
But ever since September’s report investors have been concerned that OpenAI, the unprofitable maker of ChatGPT, accounts for too much of Oracle’s future revenue. Executives addressed those fears on Wednesday, highlighting new contracts with Meta Platforms (META) and Nvidia, and said cloud resources could be reassigned to new customers in a matter of hours.
Investors are also worried about the size of Oracle’s AI investments, and how it’s paying for them. The company’s capital expenditures totaled $12 billion last quarter, $4 billion more than Wall Street expected. Oracle also raised its full-year capex target to $50 billion from $35 billion.
“Oracle is taking on the most aggressive capex plan in the industry and building a data-center footprint that looks oversized relative to its revenue base,” said Boloor in a Thursday note.
“Investors may be increasingly losing confidence in Oracle’s ability to convert this large (and still expanding) backlog into durable, profitable revenue streams,” said Morgan Stanley analysts. Bank of America analysts said investors were acting “skittish”; William Blair said it was becoming a “show-me story.”
Oracle is borrowing heavily to finance its data center buildout. It sold $18 billion of debt in September in one of the largest-ever bond sales by a tech company. Investors have in recent months bid up Oracle’s credit default swaps—effectively, insurance against the company defaulting on its debt—and that trend continued Thursday. Oracle’s management on Wednesday assured Wall Street that it will need to borrow less, “if not substantially less,” than analysts are forecasting.
While much of today’s pullback was due specifically to Oracle’s report, market watchers—including, for example, Bill Gates—are increasingly suggesting that investors can’t just throw a dart blindly and hit a surefire AI winner.
