‘Sentiment towards AI is fading’: Wall Street derides Oracle’s expansion plans

2 months ago oracle’s Shares had their best day since 1992, jumping 36% to a record after the company surprised investors with its cloud infrastructure revenue forecast.

Since then, the company has lost a third of its value, more than wiping out its profits. As we enter mid-November, stock prices are on track for their worst month since 2011.

This hype was driven by Oracle’s growing relationship with OpenAI. But the mood has changed recently, with investors questioning whether the AI ​​market has moved too far, too fast, and whether OpenAI can deliver on its five-year $300 billion promise to Oracle.

“Sentiment toward AI is waning,” KeyBanc Capital Markets analyst Jackson Ader said in an interview.

Ader said Oracle is expected to generate the least free cash flow among the major cloud companies in the GPU business. To fund the capital investments needed for Oracle’s business, Adar expects Oracle to look to more creative financing tools.

Oracle is looking to raise $38 billion in debt sales to help fund its AI buildout, said people familiar with the matter who asked not to be identified because the information is confidential. Bloomberg reported on the planned debt hike last month.

The company needs a huge pool of capital to purchase hundreds of thousands of graphics processing units (GPUs) while working with partners to develop and lease data centers across Texas, New Mexico and Wisconsin. Nvidia and advanced micro device Run the AI ​​model.

At Oracle’s big annual AI World conference in October, technology enthusiasts praised the company’s cloud infrastructure design for being easily scalable. Investors remained largely enthusiastic at the time, thanks to more than $450 billion in deals that Oracle had not yet recognized as revenue.

Skepticism began to arise immediately after the meeting. Oracle’s stock price fell 7% on Oct. 17 as investors questioned the company’s ability to meet the lofty outlook announced at its investor day. Oracle said it expects cloud infrastructure revenue to reach $166 billion in fiscal year 2030, up from $18 billion in fiscal year 2026.

Oracle’s next quarterly earnings report is expected to be released in mid-December.

Barclays analyst Andrew Keches said there are two options for Oracle: an off-balance sheet debt facility or vendor financing. Keches recently downgraded Oracle’s debt rating, citing the company’s “significant financing needs.”

“ORCL is struggling to see a path to improving its credit trajectory,” Keches wrote in a note to clients this week.

Oracle bulls point to founder Larry Ellison’s long and storied track record. A hedge fund manager who requested anonymity told CNBC that Ellison is “someone you don’t want to bet on.”

Rishi Jallia, an analyst at RBC Capital Markets, also said in an interview that Oracle could rebuild its momentum in the market by increasing its AI trading. However, Jallia currently has a ‘hold’ rating on the stock.

As more investors seek to hedge their risks, Oracle’s five-year credit default swaps have risen to a two-year high, a level that is not alarming but worth watching, credit analysts told CNBC. Credit default swaps are like insurance for investors, with the buyer paying compensation in case the borrower is unable to repay the debt.

Barclays recommended customers buy Oracle’s five-year credit default swap.

Oracle did not respond to requests for comment. Last month, CNBC’s David Faber asked Clay Magouyrk, one of Oracle’s two CEOs, if OpenAI could pay Oracle $60 billion a year. “Of course,” Magouyrk responded, while also pointing to OpenAI’s growth prospects and rapid user growth.

OpenAI CEO Sam Altman said in a post on X last week that the company’s annual revenue will top $20 billion this year and reach hundreds of billions of dollars by 2030.

DA Davidson analyst Gil Luria told CNBC’s “Fast Money” on Wednesday that Oracle represents “bad practice in building AI.” He contrasted the oracle as follows: microsoft, Amazon and googlehe said every company has available cash and customer demand to justify rapid expansion.

But when it comes to Oracle, Luria says it’s overly reliant on OpenAI, a cash-guzzling startup. Additionally, he said gross profit margins for GPU rentals are significantly lower than the roughly 80% profit margins of the company’s core business. Luria has a hold rating on the stock.

As for the initial $100 share price increase after the last earnings release, “it makes a lot of sense that that has completely disappeared,” Luria said.

Attention: Oracle and CoreWeave represent “bad behavior” in AI buildout