Following the news of Apple's lawsuit against OpenAI, Oracle's stock plummeted over 6%, troubling investors who are wary of the company's extensive partnership with the AI firm, reportedly worth $300 billion. The lawsuit raises significant concerns about OpenAI's ability to fulfill its obligations under the deal, which could spell trouble for Oracle's future financial stability.
This downturn was compounded by S&P Global's recent downgrade of Oracle's credit rating from BBB to BBB-, due to increasing business risks. Analysts pointed out that if OpenAI were to default on its commitments, Oracle could be burdened with substantial data center leases that it would struggle to escape. Notably, OpenAI constitutes approximately half of Oracle's remaining performance obligations, amplifying the risks tied to customer concentration.
In its latest earnings report, Oracle showcased impressive revenue and earnings figures, outpacing market expectations. However, the focus quickly shifted to its projected capital expenditures, which could reach as high as $95 billion by fiscal 2027, far exceeding Wall Street's forecasts. This large capital outlay is expected to drive up debt, with Oracle set to raise about $40 billion to support this initiative, causing further jitters among investors.
Despite the selloff, not all market participants are abandoning ship. Steven Fiorillo, a well-regarded analyst, believes the market has overreacted to the situation. He expressed that the risk has been fully priced in without accounting for the potential upside from Oracle's expanding backlog and the trend of customers financing their own infrastructure growth. Fiorillo describes the current situation as an opportunity for opportunistic investors.
This material is informational and should not be considered financial advice.
