Oracle's Stock Plunge Highlights AI Capex Skepticism Amid High Leverage

What happened

Oracle's stock has tumbled 30% this quarter, nearing its worst performance since 2001, as investors doubt its ability to scale data centers for AI clients like OpenAI. This skepticism persists despite Oracle's cloud revenue growing 34% year-over-year and a $523 billion RPO backlog underscoring long-term visibility. However, the company's aggressive capital expenditure has turned free cash flow negative, while net debt to EBITDA stands at a high 3.9x, raising refinancing risks. Intense competition from hyperscalers and operational challenges add to execution uncertainties, tempering the cloud growth narrative. The sell-off reflects mounting concerns that Oracle's heavy investments may not yield sufficient returns amid financial strain and competitive pressures.

Implication

The steep decline signals eroding market confidence, demanding a reassessment of Oracle's premium valuation against its negative free cash flow and elevated leverage. Oracle needs to quickly prove that its data-center spending drives high-margin cloud growth to justify its P/E of 37x and stabilize share prices. Refinancing risks from $92.6 billion in debt could pressure earnings if interest rates rise or credit conditions tighten. Competitive threats from AWS, Microsoft, and Google necessitate close monitoring of market share and customer retention trends. Ultimately, Oracle's ability to convert capex into durable cash flows while managing debt will determine whether this pullback presents a buying opportunity or a warning of deeper issues.

Thesis delta

The news reinforces the DeepValue report's 'WAIT' stance by highlighting investor skepticism around Oracle's capex-heavy AI strategy, which aligns with existing concerns about leverage and execution risk. It suggests that near-term sentiment has deteriorated, increasing downside pressure if cloud growth slows or capex fails to deliver expected returns. No fundamental shift in the thesis is warranted, but the urgency for Oracle to demonstrate capital efficiency has intensified.