Wall Street cools on Oracle's buildout plans as debt concerns mount: 'AI sentiment is waning'

Oracle's stock journey has taken a sharp downturn since its remarkable surge two months ago, when it experienced its most significant increase since 1992, climbing 36% to reach an all-time high. This spike was fueled by a promising forecast for cloud infrastructure revenue that captivated investors. However, the situation has drastically changed, with the company now losing a third of its market value, effectively erasing those initial gains. As November progresses, Oracle is on track for its worst monthly performance since 2011. Initially, excitement surrounded Oracle's deepening collaboration with OpenAI, but recent sentiments suggest that investors are beginning to doubt the sustainability of the AI market's rapid growth. Analysts are questioning OpenAI's ability to fulfill its ambitious $300 billion commitment to Oracle over the next five years, leading to a shift in investor confidence. "AI sentiment is waning," remarked Jackson Ader, an analyst at KeyBanc Capital Markets. Among the leading cloud providers involved in the GPU sector, Oracle is anticipated to generate the least free cash flow, raising concerns about its ability to finance its capital expenditures. In light of this, Ader predicts that Oracle will need to explore innovative financing strategies. To support its AI development, the company is reportedly planning to raise $38 billion through debt sales, as revealed by unnamed sources familiar with the matter. This substantial funding is crucial as Oracle collaborates with partners to establish data centers in Texas, New Mexico, and Wisconsin while acquiring vast numbers of GPUs from Nvidia and AMD. During Oracle's annual conference, AI World, held in October, attendees praised the company's scalable cloud infrastructure. Investors initially shared in this optimism, buoyed by Oracle's impressive $450 billion in signed contracts awaiting revenue recognition. However, skepticism crept in soon after the event. On October 17, Oracle's shares plummeted by 7% as doubts emerged regarding the company's ambitious revenue targets set during its investor day, which projected an increase from $18 billion in fiscal 2026 to $166 billion in cloud infrastructure revenue by 2030. Analysts are cautious about Oracle's financial trajectory. Andrew Keches from Barclays highlighted the company's substantial funding needs, prompting a downgrade of Oracle's debt rating. He expressed difficulty envisioning an improvement in Oracle's credit position. Despite this, some investors remain optimistic, citing founder Larry Ellison's impressive history in the tech sector. A hedge fund manager, wishing to remain anonymous, stated that Ellison is not someone to bet against. Rishi Jaluria from RBC Capital Markets echoed this sentiment, suggesting that Oracle could regain momentum through additional AI partnerships. However, he currently maintains a hold rating on the stock. As investors become more risk-averse, Oracle's 5-year credit default swaps have surged to a two-year high, indicating heightened caution among creditors. Barclays has advised clients to consider these credit default swaps as a protective measure. In a recent interview, CNBC's David Faber questioned Oracle's co-CEO Clay Magouyrk about OpenAI's capability to meet its $60 billion annual payment to Oracle. Magouyrk remained confident, citing OpenAI's growth trajectory. OpenAI's CEO, Sam Altman, recently projected that the company would achieve an annualized revenue of $20 billion this year, with aspirations to reach hundreds of billions by 2030. Contrasting Oracle with its competitors, analyst Gil Luria from D.A. Davidson criticized Oracle's dependence on OpenAI, deeming it an example of 'bad behavior' in the AI expansion. He pointed out that other tech giants like Microsoft, Amazon, and Google possess the necessary cash reserves and customer demand to support their growth, unlike Oracle, which relies heavily on a cash-burning startup. Luria noted that the profit margins from renting out GPUs are significantly lower than the core business margins, further complicating Oracle's financial outlook. He remarked on the dramatic reversal of Oracle's stock appreciation since the last earnings report, suggesting it was not surprising given the recent developments.