Wall Street Supports Oracle Despite Stock Drop Over OpenAI Deal
27Oracle’s stock has dropped nearly 50% since reaching its September peak, even though most Wall Street analysts remain bullish. The main reason for the disconnect is a massive $300 billion partnership with OpenAI that has investors worried about potential risks. Despite strong quarterly earnings and high growth forecasts, the market is questioning whether Oracle’s future is as secure as analysts believe.
Why Investors Are Selling Despite Analyst Confidence
Out of 51 analysts tracking Oracle, 41 rate it a buy, and only one recommends selling. Many experts see the stock as an attractive opportunity, with some predicting a 43% rise over the next year. Some portfolio managers believe the current price offers a good entry point and dismiss concerns about Oracle’s debt levels. Yet, the stock continues to decline, driven mainly by doubts over Oracle’s biggest deal.
The core issue isn’t Oracle’s recent financial performance, which shows a 95% jump in net income and a huge increase in performance obligations. Instead, the focus is on a strategic partnership with OpenAI announced earlier this year. This $300 billion, five-year deal involves Oracle providing cloud infrastructure for OpenAI’s Stargate project, a joint venture with SoftBank and others. The deal made Oracle’s stock surge initially, but now it’s a key reason for its decline.
The Circular Risk and Concentration Concerns
The main worry is that OpenAI is both a customer and a source of funding for Oracle. OpenAI has contracts with multiple cloud providers, including Microsoft and AWS, and is a significant investor in the infrastructure projects. This creates a circular situation where OpenAI’s revenue growth or slowdown directly impacts Oracle’s revenue and investments. If OpenAI struggles to meet its revenue targets, the companies funding it could face financial stress, which might ripple back to Oracle’s stock value.
Adding to the concern, OpenAI has already paused some of its expansion plans due to high costs and regulatory issues. For example, a planned data center in the UK was put on hold, and plans for a site in Abu Dhabi face geopolitical risks. When Oracle and OpenAI canceled a Texas data center project, Meta stepped in as a potential alternative, but experts see this as a sign that demand for AI infrastructure is fungible, not unique to Oracle.
Proponents of Oracle’s future argue that the demand for AI infrastructure is real and growing. Oracle has cut thousands of jobs and redirected billions of dollars into building data centers with high-performance GPUs, aiming to serve not just OpenAI but many companies training AI models. Larry Ellison, Oracle’s founder and CEO, is seen as someone who can execute his vision and steer the company through these challenges.
Overall, while the market remains wary of the complex dependencies and risks, many analysts believe Oracle’s long-term prospects remain strong. The company’s focus on AI and cloud infrastructure continues to attract investor interest, even as the stock price faces short-term pressure from fears about the OpenAI deal’s circular nature and funding challenges.
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