Three months ago, Oracle appointed Clay Magouyrk and Mike Sicilia as its new CEOs. They are experiencing a challenging beginning. Oracle shares have experienced a decline of 30% thus far this quarter. With four trading days left in the period, the stock is set to experience its most significant drop since 2001 and the dot-com bust. Investors have become increasingly doubtful regarding the database software vendor’s capacity to establish additional server farms for ChatGPT operator OpenAI, which committed in September to invest over $300 billion with Oracle. Earlier this month, Oracle disclosed quarterly revenue and free cash flow figures that fell short of expectations. During the earnings call, the newly appointed finance leader Doug Kehring announced a target of $50 billion in capital expenditures for fiscal 2026, representing a 43% increase from the plan established in September and double the amount from the previous year. Additionally, Oracle is planning to invest $248 billion in leases to enhance cloud capacity, in addition to constructing data centers. This level of growth will necessitate substantial amounts of debt. In September, Oracle executed a substantial bond sale, raising $18 billion, marking one of the largest debt issuances recorded within the technology sector. Kehring affirmed during the earnings call the intention to maintain Oracle’s investment-grade debt rating. However, certain skeptical investors are wagering differently, resulting in an increase in the prices of Oracle’s credit default swaps. “Considering Oracle is already barely hanging on to an investment grade rating, we would be concerned about Oracle’s ability to live up to these obligations without restructuring its OpenAI contract,” analysts at D.A. Davidson noted in a communication to clients on Dec. 12. Their assessment aligns with a hold rating on the stock. Oracle refrained from providing any commentary.

Approximately two weeks prior to assuming leadership from Safra Catz, Oracle disclosed a revenue backlog of 359%, significantly influenced by OpenAI’s commitment. The agreement signified a significant validation for Oracle, which was excluded from Gartner’s ranking of the top five cloud infrastructure providers by revenue for 2024. In the wake of the announcement regarding the OpenAI agreement on September 10, Oracle experienced a significant increase in its stock value, soaring nearly 36%. This marks the third most substantial rally since the company’s initial public offering in 1986. The shares attained an intraday peak of $345.72. “We think $340 was terrifying,” stated Zachary Lountzis during an interview. Lountzis possessed $25 million in Oracle shares as of September 30, based on a filing. The stock has subsequently experienced a decline of 43% in its value, concluding on Wednesday at $197.49. However, it received a boost last Friday following TikTok’s announcement of an agreement to divest a portion of its U.S. operations to Oracle and other investors. For years, Oracle has provided cloud services to TikTok. Lountzis indicated that his team initially acquired Oracle shares in 2020, at a price point under $60. It has maintained its stake amid the recent fluctuations, acquiring approximately 30,000 additional shares in the first quarter of this year. “Our philosophy is that we’re comfortable with short-term overvaluation as long as the underlying economics of the business remain unchanged, and that was indeed the situation with Oracle,” Lountzis stated. “We did not perceive a shift in the economics of the business despite the influx of predominantly positive news that emerged. And I think what we’ve observed from $340 down to $180 is actually a very healthy correction.”

Lountzis attributes a significant portion of his confidence in the company to Larry Ellison, as reported. “You would have gone bankrupt 40 times betting against Larry over the last 50 years,” Lountzis stated. “He perceives the future.” In October, Sicilia, Magouyrk, and Kehring articulated a vision for a significantly accelerated Oracle, projecting revenue to increase to $225 billion in the 2030 fiscal year from $57 billion in fiscal 2025. The majority of this growth is expected to stem from the infrastructure surrounding artificial intelligence, with Nvidia’s graphics processing units playing a pivotal role in this development. While Magouryk advised analysts to brace for “hypergrowth,” this expansion would likely sacrifice profitability, given that Oracle’s core software business yields significantly higher margins. In fiscal 2021, Oracle reported a gross margin of 77%. Analysts project a decline to approximately 49% by 2030, anticipating a cumulative negative free cash flow of around $34 billion over the next five years, before a positive shift is expected in 2029. Eric Lynch, remarked on the challenges investors face in gaining confidence in Oracle’s strategic initiatives. “Four or five years is a considerable duration,” Lynch stated. “That is simply outside the parameters of our investment strategy.” Lynch expressed concerns regarding the substantial reliance on OpenAI, which is rapidly depleting its cash reserves and has pledged over $1.4 trillion towards comprehensive AI developments and investments. “Will the demand be there from OpenAI?” Lynch inquired.

Analyst Michael Turrin initiated coverage of Oracle earlier this month, assigning it a buy rating and setting a price target of $280. The industry’s perception is expected to enhance should Oracle successfully engage with OpenAI, potentially representing over one-third of the company’s revenue by 2029, as estimated by Turrin. “They’re kind of shifting away from more of a value-oriented business to a more growth-oriented business,” Turrin stated. A significant challenge for Oracle persists in its efforts to capture market share in cloud infrastructure, where the company significantly lags behind Amazon, Microsoft, and Google, despite having a customer roster that includes prominent names such as Meta, Uber, and Elon Musk’s xAI. Databricks, recently valued at $134 billion in a funding round, does not offer its widely used data processing software on Oracle’s cloud platform. That will occur “when customers start banging on my door, saying, ‘You need to run on Oracle,’” stated Ali Ghodsi in an interview. “It is possible that progress is being made, yet we have not received confirmation of this.” Snowflake, a competitor of Databricks, has yet to extend its services to Oracle. Turrin indicated that Oracle’s standing in the market will depend significantly on the effectiveness of its AI development efforts. “Then customers start to look at this and say, wow, this company was trusted to build some of the largest training clusters in the world, and they’re delivering on them,” Turrin stated. “It is imperative that we examine this matter closely and ascertain the underlying dynamics at play.”