Oracle shares fall almost 30% in a month

(Image credit: Justin Sullivan/Getty Images)

Shares in Oracle, one of the world’s largest computing infrastructure companies, fell by 29.4% in the month to 13 November, as concerns over the feasibility of artificial intelligence (AI) spending commitments and stock market valuations take hold.

Technology and AI stocks are coming under pressure thanks to extreme valuations – stoking fears of an AI bubble set to burst – and growing questions over the circularity of AI financing.

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The Nasdaq 100, which is mostly composed of technology stocks, fell 2.4% across the two sessions to 13 November. That followed a decline of 3.1% the previous week. The sudden declines take place against a broader wave of selling US stocks.

“Eight of the biggest AI-related stocks – including Nvidia, Meta, Palantir and Oracle – shed $800 billion [in market cap during the week to 7 November],” said Tom Stevenson, investment director at investment service provider Fidelity International, “as investors worried about high valuations, heavy expenditure that may or may not earn a decent return and the growth of debt-funding with echoes of both the dot.com bubble and financial crisis.”

Oracle’s shares gained 36% in a single session on 10 September, following a blowout earnings report that revealed a huge partnership with ChatGPT maker OpenAI. According to the Wall Street Journal, the deal will see OpenAI buy $300 billion of computing infrastructure from Oracle over approximately five years.

But since then the optimism around ever-increasing tech capex has waned, and investors are starting to question whether there will be a return on this spending – or if it is even going to materialise.

AI infrastructure spend: debt hits equities

Oracle’s latest price slump meant its shares closed trading on 13 November nearly 10% below their level before the OpenAI announcement.

During the intervening period, questions have surfaced around exactly how OpenAI plans to fund the spending spree that it has committed to, which totals $1.4 trillion (£1.1 trillion) over the next eight years. As well as Oracle, this includes spending agreements with companies like Nvidia and AMD.

It isn’t known how much revenue OpenAI makes (as a private company it doesn’t need to disclose this frequently) but its CEO Sam Altman has claimed its annualised revenue rate will reach $20 billion by the end of this year. If so, it will be heavily reliant on other forms of capital – including debt – to finance its spending commitments.

In October, Bloomberg reported that Oracle is preparing to raise $38 billion in debt to fund its data centre buildout.

On 13 November, Gil Luria, head of technology research at investment bank D.A. Davidson, accused Oracle of “bad behaviour in the AI buildout” in an interview with CNBC.

Luria stated that Oracle’s reported order backlog was originally framed as being from a more diverse customer base than OpenAI alone, and that considering the $1.4 trillion that OpenAI has committed to, “it has no intention of living up to those obligations”.

OpenAI instead views the agreement as “a flexible arrangement [where] they can consume as much as they want”, said Luria. “It’s not real demand.”

Should you buy Oracle shares?

Oracle’s share price swings over recent months has pushed this long-term big tech stalwart – one of the largest and best-established outside the Magnificent Seven – more firmly into investor attention.

Ultimately, the long-term viability of Oracle’s stock comes down to whether the company’s future financial performance justifies its new, elevated valuation.

Following the recent losses, Oracle stock now trades at 52 times its earnings over the past 12 months, and around 33 times projected earnings over the next 12, so it will need to continue growing in order to meet these expectations.

Oracle’s stock is “more stable” at that level “than it was at 45 times earnings”, said Luria.

He also stressed that its core cloud business is growing and that it could end up owning a stake in TikTok depending on how TikTok’s US divestment from ByteDance shakes out.

“Those are reasons to get excited about Oracle beyond the core business,” said Luria, but he added that it made sense that the gains the stock posted following the OpenAI announcement had since dropped off.

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Dan is a financial journalist who, prior to joining MoneyWeek, spent five years writing for OPTO, an investment magazine focused on growth and technology stocks, ETFs and thematic investing.

Before becoming a writer, Dan spent six years working in talent acquisition in the tech sector, including for credit scoring start-up ClearScore where he first developed an interest in personal finance.

Dan studied Social Anthropology and Management at Sidney Sussex College and the Judge Business School, Cambridge University. Outside finance, he also enjoys travel writing, and has edited two published travel books.