Oracle's Stock Has Completely Erased Its AI Pop. Are Shares a Buy Today?
If you're looking for examples of the volatility surrounding the artificial-intelligence ("AI") boom, look no further than software giant Oracle (ORCL)...
The company entered the year with a market cap of more than $450 billion – making it one of the largest publicly traded companies in the world. And thanks to AI, that surged to nearly $900 billion in October.
But the good times didn't last long, and Oracle's shares are now down more than 50% from their peak. Still, Oracle is the 14th-largest U.S. company by market cap today. After such a large sell-off, is it time to start dipping your toe into buying Oracle shares?
First, we have to cover what a wild few months it's been...
Oracle's Push Into AI
For years, Oracle was known just as a software company. It had offerings ranging from database management to analytics and even health care records. But within the past year, Oracle has made a huge push into AI.
It all came out in the company's first quarter.
Back then, Oracle reported strong earnings and much stronger forward guidance than was previously expected. As our colleague Dan Ferris wrote in the September 12 issue of The Stansberry Digest...
[CEO Larry] Ellison also said he expects the company's annual cloud infrastructure revenue to grow from $10 billion today to $144 billion by 2030. That's a 14-fold increase in just five years.
That wasn't the only good news... Oracle also named a huge new customer. Our colleague Sam Latter broke down the news in a September issue of Stock Market Trends:
Oracle recently signed a record-breaking $300 billion deal with OpenAI, the company behind ChatGPT. Over the next five years, Oracle will provide OpenAI with up to 4.5 gigawatts of cloud capacity – enough to support a small city. That contract alone could generate $60 billion annually starting in 2027.
That led to the stock soaring nearly 40% higher in a day, briefly making Ellison the richest man in the world. Those gains evaporated by the time Oracle next reported its earnings, in December.
Oracle's Second Quarter
Going into the second quarter, investors were hoping the good news would continue. And on the surface, it did...
Earnings per share came in at $2.26 and beat estimates, while revenue grew 14% and fell just short of expectations. And remaining performance obligations ("RPOs") – a measure of contracted revenue that it hasn't received yet – surged for the second straight quarter thanks to some of the biggest players in AI. From the press release...
Remaining Performance Obligations (RPO) increased by $68 billion in Q2 – up 15% sequentially to $523 billion – highlighted by new commitments from Meta, NVIDIA, and others.
But the stock fell anyway, continuing the recent downtrend since its September earnings report.
And, so, the big question – why?
Oracle's Cash Flows Are a Problem
In its second-quarter earnings report, Oracle projected $50 billion in capital expenditures ("capex") during this fiscal year, up from its previous estimate of $35 billion. That would also be more than double the $21 billion Oracle spent on capex in its 2025 fiscal year.
On the surface, that doesn't seem too out of place with the rest of the AI leaders...
Just looking at one example, Alphabet (GOOGL) is expected to spend somewhere between $91 billion and $93 billion on capex this year.
But companies like Microsoft (MSFT), Meta Platforms (META), and Alphabet all produce loads of free cash flow ("FCF") from their core businesses. That position of strength allows them to spend big when they see fit.
Oracle doesn't have the same luxury. Our colleague and True Wealth editor Brett Eversole highlighted this at our annual Stansberry Research conference in October, and he wrote about the concerns about Oracle's growth strategy in his November issue. From Brett's report...
Unlike the hyperscalers we described above, Oracle's core business isn't massive. It generated about $12 billion in FCF in 2024. That's a lot by most measures... but not in the context of the current data-center build-out.
To fulfill its side of the [OpenAI] partnership, analysts estimate Oracle will need to spend all of its cash flow and borrow roughly $100 billion. It already borrowed $38 billion from a consortium of banks. And it's in the process of putting together an $18 billion bond offering.
From 2020 through the 2025 fiscal year, Oracle has generated $51 billion in FCF. So, to meet its capex goal of $50 billion for just this year, Oracle would have to use nearly all of the free cash flow it has generated over the past five years.
And just this year alone, the company has already run at a FCF deficit.
It's no wonder that the company has to turn to the debt markets to finance its investment. And that will make Oracle the "canary in the coal mine" for AI boom stocks that could go bust. More from Brett...
If the company can't raise the money it needs to fuel its growth, that will ring some alarm bells.
We're already seeing warning signs pop up. A measure of Oracle's credit risk just hit the highest intraday level since the financial crisis. That means folks are less confident in Oracle's ability to manage its debt load.
The Latest Bad News for Oracle
On Wednesday morning, the Financial Times reported that Blue Owl – a private equity firm that has had a hand in some huge AI deals – would not be backing a $10 billion funding round for Oracle's next data center.
Oracle has plans to build a 1 gigawatt ("GW") data center in Michigan as part of its spending spree to invest in its AI business. But now, the data center's future is unclear without a funding path.
As the FT notes, Blue Owl has been Oracle's "primary backer" in funding its AI expansion. But now, Blue Owl is getting cold feet. That's a telling sign of what investors – both large and small – are thinking about Oracle's position in the AI race.
The headline sent Oracle shares down another 5% on Wednesday. The company later said that the plans for the Michigan facility were "on schedule" without Blue Owl, but the damage had been done – with even more investors questioning Oracle's debt-funded plans.
Including Wednesday's decline, Oracle's stock is now down more than 50% from its high – and is sitting at its lowest level in six months.
That drop may be enough to get some investors interested in buying the shares today. So, let's take a look...
Are Oracle's Shares a Buy After Their Plunge?
Looking at our proprietary Stansberry Score, Oracle gets an overall grade of B – ranking it just outside the top 1,000 of the 4,600-plus stocks we track.
Source: Stansberry Research
Under the hood, Oracle gets a B grade for its Financials and an A grade for Capital Efficiency, because software historically doesn't need a lot of capex to grow.
(Oracle's grade on Capital Efficiency may change as it spends to meet its lofty AI goals, but for now it's still an A.)
The last component is Valuation. Oracle gets a C grade for Valuation, meaning that shares aren't cheap today, nor are they trading at sky-high levels, either.
Putting it all together, our Stansberry Score indicates that Oracle is a solid company for long-term investors, but it may not be a "screaming buy" today.
There's one other piece to our Stansberry Score – the Momentum Bonus. This component gives an added bonus to stocks that are rising. Unfortunately for ORCL, it falls short on that metric thanks to the monthslong slide in the share price.
Oracle still may have a huge part to play in the AI boom in the coming months and years. It's got deals with some of the biggest names in the trend and has quickly established itself as a name to watch in AI.
But with its C score for Valuation, downward momentum, and the bad news still coming, now is not the time to catch a falling knife in Oracle shares.
Regards,
Nick Noziol
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