‘AI sentiment is waning.’ Wall Street cools on Oracle buildout plans

Two months ago, Oracle’s stock had its best day since 1992, soaring 36% to a record after the company blew away investors with its forecast for cloud infrastructure revenue.

Since then, the company has lost one-third of its value, more than wiping out those gains. Midway through November, the stock is on pace for its worst month since 2011.

The hype was sparked by Oracle’s strengthening ties to OpenAI. But the mood of late has turned, with investors questioning whether the AI market ran too far, too fast and whether OpenAI can live up to its $300 billion commitment to Oracle over five years.

“AI sentiment is waning,” said Jackson Ader, an analyst at KeyBanc Capital Markets, in an interview.

Ader said that of the big cloud companies in the GPU business, Oracle is expected to generate the least amount of free cash flow. To fund the capex required for Oracle’s business, Ader expects Oracle to turn to more creative financing tools.

Oracle is looking to raise $38 billion in debt sales to help fund its AI buildout, according to sources with knowledge of the matter who asked not to be named because the information is confidential. Bloomberg reported on the planned debt raise last month.

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The company needs a massive pool of capital as it works with partners to develop and lease data centers across Texas, New Mexico and Wisconsin, while also buying hundreds of thousands of graphics processing units (GPUs) from Nvidia and Advanced Micro Devices to run AI models.

At Oracle’s big annual conference in October, called AI World, tech enthusiasts cheered the company’s cloud infrastructure design as being easily scalable. Investors remained largely enthusiastic at the time, thanks to Oracle’s over $450 billion in signed contracts that hadn’t yet been recognized as revenue.

Skepticism started to hit shortly after the conference. Oracle shares fell 7% on Oct. 17, as investors questioned the company’s ability to reach its lofty outlook announced at its investor day. Oracle said it expected to reach $166 billion in cloud infrastructure revenue in the 2030 fiscal year, up from $18 billion in fiscal 2026. 

Oracle’s next quarterly earnings report is expected in mid-December.

Andrew Keches, an analyst at Barclays, said off-balance sheet debt facilities and vendor financing are two options for Oracle. Keches recently downgraded Oracle’s debt, 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 this week.

Oracle bulls point to founder Larry Ellison’s long and storied track record. A hedge fund manager who asked to remain anonymous told CNBC that Ellison is “someone you don’t want to bet against.”

And Rishi Jaluria, an analyst at RBC Capital Markets, said in an interview that Oracle could rebuild its momentum in the market with more AI deals. However, Jaluria currently has a hold rating on the stock.

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As more investors look to hedge their bets, Oracle’s 5-year credit default swaps have climbed to a 2-year high, a level that’s not alarming but worth watching, credit analysts told CNBC. Credit default swaps are like insurance for investors, with buyers paying for protection in case the borrower can’t repay its debt.

Barclays recommended clients buy Oracle’s 5-year credit default swaps.

Oracle didn’t immediately respond to a request for comment. Last month, CNBC’s David Faber asked Clay Magouyrk, one of Oracle’s two CEOs, whether OpenAI will be able to pay Oracle $60 billion a year. Magouyrk responded, “of course,” while also pointing to OpenAI’s growth prospects and rapid rise in users.

OpenAI CEO Sam Altman said in a post on X last week that the company will top $20 billion in annualized revenue this year and reach hundreds of billions of dollars by 2030.

Gil Luria, an analyst at D.A. Davidson, told CNBC’s “Fast Money” on Wednesday that Oracle represents the “bad behavior in the AI buildout.” He contrasted Oracle with Microsoft, Amazon and Google, which he said all have the available cash and customer demand to justify their rapid expansions.

For Oracle, however, there’s an overreliance on OpenAI, a cash-burning startup, Luria said. Additionally, he said that gross margins for renting out GPUs are dramatically lower than the roughly 80% margin in the company’s core business. Luria has a hold rating on the stock.

In terms of the $100 of stock appreciation that initially followed the last earnings report, “it makes a lot of sense that that’s completely gone away,” Luria said.

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