Capital Lab for Edge Investing
Capital Lab for Edge Investing
Oracle's OpenAI "Bake-Off" Win: Was It All Smoke and Mirrors?
Alright, let's talk Oracle. The stock took a 3.5% hit today, and the finger is being pointed at DA Davidson analyst Gil Luria. He's maintaining a "neutral" rating but slashed the price target by a third—down to $200. Now, on the surface, that doesn't seem catastrophic, considering the stock is hovering around $194. But the why behind the cut is what's interesting. Why Oracle Stock Sank Today
Luria's argument hinges on the supposedly rock-solid OpenAI deal. Remember when Oracle announced that massive $300 billion, 5-year contract? (A figure that, even in today's inflated market, raised eyebrows.) It positioned Oracle as the clear winner in some kind of AI infrastructure bake-off. But Luria's digging suggests that OpenAI accounted for "almost the entire increase" in Oracle's backlog at that time.
Since then, OpenAI has inked over a trillion dollars in AI data center contracts elsewhere. That’s not a typo. Trillion. This leads Luria to believe, and I quote, that OpenAI is "not a serious counterpart and that Oracle was a pawn in the grand game of fake it 'till you make it." Harsh words, but are they backed by numbers?
Let's look at the context. A separate article highlights a "Power Inflow" signal for Oracle, triggered at $189.58, leading to a temporary intraday high of $199.41. This "Power Inflow" is supposedly a bullish indicator based on order flow analytics—institutional and retail traders piling into the stock. But, and this is a big but, that pop was intraday. A short-term blip doesn't negate the larger downward trend. And this is the part of the analysis where I find myself getting a little skeptical of the "Power Inflow" indicator. Is it really predictive, or just a fancy way of describing a normal market fluctuation? I would want to see a statistically significant long-term correlation between "Power Inflow" alerts and sustained price increases before I'd bet the farm on it.
Oracle's valuation has been a concern for a while. Back when the OpenAI deal was fresh news and the stock was trading at $328, I (and others, I'm sure) flagged it as overvalued. Now, after a 40% drop, the stock is still trading at a hefty 46 times earnings. The projected growth rate, even with the OpenAI revenue factored in, is only 23% per year—to be more exact, that's about 23.4%. That puts the PEG ratio at 2.0, which is, shall we say, optimistic.
What happens if those OpenAI orders don't actually materialize? That 23% growth evaporates, and Oracle's valuation suddenly looks even more precarious. It’s like building a skyscraper on a foundation of sand, hoping the tide doesn't come in.
Oracle is still a massive company with a market cap of $562 billion. The gross margin is a respectable 66.10%, and the dividend yield is a modest 0.96%. (Nothing to write home about, but not insignificant either.) Volume is averaging 26 million shares, and today’s volume is relatively low at 1.2 million. But those are backward-looking numbers. The question is, what's the forward-looking outlook?
Oracle's reliance on cookies and similar tracking technologies, as detailed in another article, also raises a few questions. While these cookies are used for everything from "strictly necessary" service functionality to "ad selection and delivery," the implications for user privacy are worth considering. (And the sheer length of the cookie notice is enough to make anyone's eyes glaze over.) While these tracking practices may be standard, they can also be a source of potential risk and regulatory scrutiny.
Luria's accusation that Oracle was a "pawn" is a serious one. It suggests that Oracle was used to create a false impression of demand or stability, potentially inflating the stock price. If that's the case, then the recent drop could be just the beginning. The real question is, did Oracle know what was happening? Or were they genuinely duped? The answer to that question will have a significant impact on the company's future.
The market often chases hype, and AI is the current obsession. But hype needs to be grounded in reality. Oracle's situation is a stark reminder that even the biggest companies can be vulnerable to market sentiment and inflated expectations. The OpenAI deal, which once looked like a major coup, now appears to be a potential liability.
The data suggests Oracle's valuation is stretched thin, propped up by a potentially shaky AI narrative. The stock price might still have further to fall.