Watch Oracle Stock for an End to the AI Slump

Oracle shares had their best day since 1992 in September. All those gains have been lost. (Dreamstime)

Key Points

• Oracle’s shares have fallen by nearly 40% since early September, reducing its market value by almost $360 billion.
• Approximately 65% of Oracle’s projected additional revenue, or $300 billion, is reportedly tied to a contract with OpenAI.
• The cost of credit-default swaps on Oracle’s five-year bonds has nearly tripled in the last three months.

An oracle is a person, usually possessing long-earned wisdom, that can share reliable information about the future. Oracle is a cloud-software company, now tied closely to the artificial intelligence investment trade, that may be doing the same thing.

And it doesn’t look good.

Shares in Oracle have tumbled 40% since early September, lopping nearly $360 billion from its market value, since the company unveiled a huge jump in projected revenue from its burgeoning AI business. The stock declined 5.7% to $198.76 on Friday, as the S&P 500 and other major indexes all rallied.

That is largely because Oracle is planning to borrow a ton of cash to make those sales. Oracle’s overall debt stands north of $100 billion. It tapped the bond market for $18 billion last month and reports suggest it is planning another debt sale worth $38 billion.

The company didn’t immediately respond to a request for comment.

Spending all that cash on AI infrastructure is, by itself, a key concern for investors worried about the financial arithmetic of the world’s hottest new technology. But it’s even more worrying when the anticipated revenue is reliant on computing-power purchases by OpenAI, the money-losing creator of ChatGPT backed by Microsoft.

OpenAI’s relationship with Nvidia also casts doubt on revenue at Oracle. The leading market of AI chips announced a $100 billion investment in OpenAI in September, but it isn’t certain a deal will go through.

Nvidia said Wednesday in a Securities and Exchange Commission filing published along with its third-quarter earnings report that there’s “no assurance we will enter into definitive agreements with respect to the OpenAI opportunity or other potential investments.”

That’s not the kind of language you want to hear about investment in a company that has made $1.4 trillion in infrastructure spending commitments over the next 10 years, but isn’t likely to turn a profit before at least the next five.

“The OpenAI/Oracle axis is what you have to worry about,” Jim Cramer said on CNBC Friday.

You can’t, of course, short a private company. OpenAI may not come to market for at least a year, and possibly longer, as it maps out its business model and investment plans under CEO Sam Altman. But what you can do is dump publicly traded assets that serve as a proxy. That appears to be what is happening to Oracle.

The company hasn’t answered questions on how it plans to finance its AI spend, and its credit rating is low to begin with. Wall Street expects Oracle to borrow more debt in the future, thus increasing its credit risk.

The cost of credit-default swaps on Oracle’s five-year bonds, which track the cost of insuring them against the worst-case scenario, have nearly tripled over the past three months. The company’s credit risk exploded in October, driven by concerns about its ability to finance its capex needs in the face of insufficient cash flow generation.

Less than five years ago, the creditworthiness of Oracle’s unsecured debt was high-A rated, before the company decided to divert a significant portion of its cash flow to shareholders, resulting in multiple-notch downgrades.

Currently, Oracle is rated mid-BBB at negative outlook at both Moody’s and S&P. Microsoft, by comparison, is AAA rated, while Amazon.com is AA rated.

As of Friday afternoon, Oracle’s credit default swap levels were at 115, while both Microsoft and Amazon were at 35. In mid-September, Oracle’s CDS was trading at just 44.

Oracle stock, aside from shedding more than a third of its value since early September, has fallen nearly 12% this week alone. It is trading south of its 200-day moving average, a key indicator of longer-term performance that often triggers more selling.

Short interest in the stock has spiked as well, with around 20.5 million shares pegged to bets against the company, or around 1.2% of Oracle’s outstanding float.

So what is all this telling us? Goldman Sachs says Oracle has become a “barometer for AI risks” that “draws skeptics looking for a hedge.”

Moves in the stock also highlight the kind of separation that has emerged in the AI trade. Companies that are still making money from their core businesses, and expect to make more from their AI investments, are performing well. Alphabet, for example, has risen 15% over the past month, compared with a 3.8% slump for the Nasdaq Composite.

Those that are seen as spending too much, or unable to bring in revenue from their data-center investments in the future, are suffering. Meta Platforms is down 20% over the past month.

With those concerns continuing to grip markets, even after Nvidia’s impressive set of third-quarter earnings and upbeat commentary from CEO Jensen Huang, it will be hard for Oracle to escape its current status as the augur of the AI bubble.

Write to Martin Baccardax at martin.baccardax@barrons.com and Mackenzie Tatananni at mackenzie.tatananni@barrons.com