Updated Aug 7 at 11:21am ET.
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Michael Burry, the investor who became famous for predicting the 2008 financial crisis, announced he is shorting Oracle. Shorting is a way to bet that a company's stock price will go down. Burry suggests that several companies tied to the artificial intelligence boom have become bloated and are now vulnerable to a drop.
This matters because Oracle has recently seen its stock tied closely to AI demand. The company is spending billions of dollars to build data centers for AI work. While Burry is known for making bold bets that do not always pay off immediately, his move highlights a growing concern that the massive spending on AI infrastructure might not deliver the profits some expect.
UBS lowered its price target for Oracle from $285 down to $245. A price target is what an analyst believes a stock will be worth over the next year. Even with this reduction, the new target is still much higher than where the stock currently trades.
This adjustment suggests a slightly more cautious view on how quickly Oracle can grow, but it does not change the overall outlook. The firm still expects the stock to gain value as Oracle continues its shift from older software into the cloud infrastructure market.
Source: UBS
Oracle is facing a potential downgrade to a junk-grade credit rating, a label given to companies that lenders believe have a higher risk of not paying back their debts. This comes as the company spends billions of dollars to build out the data centers required for its artificial intelligence services.
This is a significant shift in how the market views Oracle's aggressive expansion. While the company has a record backlog of signed contracts, it is currently spending more cash than it brings in to build the physical capacity to fulfill those deals. If its credit rating is lowered, it will become more expensive for Oracle to borrow the money it needs to keep growing, putting more pressure on the business to turn its AI investments into profit quickly.
Source: Reuters
Oracle, along with Microsoft, Meta, Amazon, and Alphabet, has committed to about $1.09 trillion in future lease payments for data centers. These are contracts for facilities that have not yet opened but are being built to handle the massive computing needs of artificial intelligence.
For Oracle, this highlights the high stakes of its growth strategy. The company is betting that the demand for AI will be high enough to pay for these massive long-term obligations. While these leases secure the physical space Oracle needs to compete, they also represent a heavy financial burden that the company must carry regardless of how quickly it can sign up new customers.
Source: Reuters
Analysts are warning that the "tech and semis trade" may soon be judged by the cost of the debt used to fund it. As the big cloud companies continue to spend heavily on data centers, investors are looking more closely at whether the returns from AI will outweigh the rising interest costs on the billions being borrowed.
This is particularly relevant for Oracle, which has spent more than $50 billion on data center construction in a single year. While Oracle has a massive backlog of signed contracts, the company has moved into a phase where it is spending more cash than it brings in to build capacity. If borrowing costs remain high or rise further, the path back to positive cash generation could take longer than expected.
Analysts recently issued a flurry of price target updates following the company's latest growth reports. Most analysts are bullish, with 56 of 86 rating the stock a buy and an average target price suggesting 70% upside.
Management has a very consistent habit of beating their own targets, having cleared the bar in five of the last eight quarters while growing revenue by about 20 percent.
| Expectation | |
|---|---|
| EPS | $1.72 |
| Revenue | $19.13B |
