Oracle Stock: Bull-Bear Debate About OpenAI Contracts Rages On

oracle (ORCL) stock is coming off a brutal month, with shares falling more than 20% in November and falling further on the first trading day in December. The biggest controversy surrounding Oracle has been its massive cloud deals with ChatGPT creator OpenAI – with analysts offering recent bullish and bearish views.

Shares of Oracle rose in September after the company revealed that its remaining performance obligations rose 359% to $455 billion during the quarter ended in August. The Wall Street Journal reported the next day that the revenue backlog included a $300 billion cloud infrastructure deal with OpenAI. By mid-October, investors reversed course and began focusing on concerns about how Oracle would finance construction of the data center needed to meet demand for artificial intelligence.

Oracle stock has retraced its entire September rally and is now at its lowest levels since June.

Deutsche Bank has a bullish offer on Oracle shares

Deutsche Bank analyst Brad Zelnick defended the battered enterprise technology leader. He reiterated his buy call and 375 price target in a note to investors late last week. Even the bearish case for Oracle looks bullish – with earnings and revenue growth looking strong outside of OpenAI’s contribution, he said.

“While we appreciate the financial and operational risks, our view is that these risks are offset by a very real opportunity as OpenAI’s backlog represents strong business ROI, continues to advance as planned, and validates Oracle’s leadership in deploying cloud AI infrastructure at scale,” Zelnick wrote.

Oracle has turned to debt financing by selling bonds recently and has sharply increased its capital expenditures. This is particularly concerning to some investors given that Oracle’s cloud infrastructure relies heavily on OpenAI. With ChatGPT still an unprofitable product, OpenAI has committed more than $1 trillion in cloud spending with Microsoft, Oracle, Google, and others.

As for Oracle, Zelnick said the risk-reward for the stock is “strongly skewed to the upside, and in the midst of a downturn, represents an attractive entry point for investors when looking at the entire Oracle business.”

Oracle seen as ‘trapped in a box’

On the other hand, CFRA analyst Angelo Zino last week downgraded Oracle shares to a neutral level of buy. Oracle’s debt exceeds $100 billion, and Zeno expects negative free cash flow for the company over its next three fiscal years.

“We believe Oracle faces a risky situation where aggressive customer acquisition raises concerns about a credit downgrade, while maintaining the status quo risks losing market share if OpenAI cannot meet commitments,” Zeno wrote.

Likewise, OpenAI’s massive commitments create several risky scenarios for Oracle, said Gil Loria, an analyst at DA Davidson. Investors are closely monitoring Oracle’s credit default swap rates, which protect the company from defaulting on its debt over the next five years.

“Although we do not believe a default is a likely outcome for Oracle, we believe the increase in the cost of insuring Oracle’s debt is an indication that the market perceives that Oracle has borrowed too much for a client that may or may not materialize,” Loria said in a note to the client. He has a neutral option on Oracle stock.

Oracle stock is below its 200-day line

Oracle stock fell slightly to close near 201.30 on the stock market on Monday. Shares remain below Oracle stock’s 200-day moving average.

The company will have a chance to rebut Wall Street’s concerns later this month. Oracle is expected to publish its second-quarter financial results on December 15. The company has not yet provided an official date.

Meanwhile, Oracle stock carries an IBD Composite Rating of 60 out of 99, according to IBD Stock Screener. IBD’s Composite Rating is a combination of key fundamental and technical metrics to help investors gauge a stock’s strengths. The best growth stocks have a Composite Rating of 90 or better.

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