Oracle (ORCL) Stock: Is the 37% Drop a Buy Signal or Warning Sign?

TLDR

• Oracle stock has dropped 37% from its September high of $346 to around $217, losing nearly 40% of its market value in three months
• The decline stems from investor concerns about heavy capital expenditures and debt accumulation to build AI infrastructure that hasn’t yet generated strong free cash flow
• Q2 earnings on December 10 will be critical, with Wall Street expecting $1.64 EPS and $16.19 billion revenue
• Mizuho analyst maintains a $400 price target and Outperform rating, calling the pullback a buying opportunity
• Oracle’s forward P/E has dropped from over 40x to 27x, trading at a discount to competitors like Microsoft at 32x

Oracle stock has experienced a dramatic reversal. Three months ago, shares were trading at an all-time high near $346. Today, the stock sits around $217.

Oracle Corporation, ORCL

That’s a 37% decline from the September peak. The company has lost nearly 40% of its market value in just three months.

The market’s attitude toward Oracle has changed completely. In September, investors celebrated the company’s expansion plans and nuclear-powered data center ambitions. Now, they’re scrutinizing the balance sheet instead.

The concern centers on debt. Oracle is borrowing heavily to finance infrastructure projects. These projects haven’t produced adequate free cash flow yet.

The company has positioned itself as a financier for the AI revolution. It’s building infrastructure for major AI labs like xAI and Cohere. But investors worry these investments may strain finances before generating returns.

Valuation Gets Cheaper

Oracle’s valuation metrics have dropped considerably. The forward P/E ratio fell from over 40x to 27x. Microsoft trades at 32x by comparison.

Oracle now trades at a discount to major hyperscalers like Microsoft and Amazon. Some analysts see this as justified due to Oracle’s higher leverage and lower free cash flow conversion. Others view it as an opportunity.

At 27x earnings, Oracle is priced only slightly above a traditional software company. Yet Oracle Cloud Infrastructure is set to grow over 70% this fiscal year.

The nuclear data center concept has hit roadblocks. Recent FERC rulings on data center colocation at power plants have cooled expectations. The market has likely removed any “nuclear premium” from the stock price.

The December 10 Earnings Test

Oracle’s Q2 earnings report Wednesday will be crucial. Wall Street expects adjusted earnings per share of $1.64, up 11.6% year-over-year. Revenue is forecast at $16.19 billion, reflecting 15% growth.

Investors will focus on one key metric: how quickly Oracle converts its backlog into recognized revenue. The company has a $400 billion backlog in remaining performance obligations. But backlog doesn’t pay debt obligations.

Oracle needs to prove its heavy capital expenditures are quickly translating into billable revenue. If the backlog grows while revenue stagnates, it signals deployment or demand problems.

Mizuho analyst Siti Panigrahi maintains an Outperform rating and $400 price target. He believes the recent weakness has gone too far. Panigrahi notes that Oracle shares dropped 34% while the broader tech-software ETF fell just 2% in the same period.

The analyst says concerns about rising data center spending overlook a key point. Demand for high-density AI capacity exceeds supply. Oracle is converting new GPU deployments into revenue within weeks.

Panigrahi expects Oracle to use common AI sector financing tools. These include vendor financing and capital leases. Such options lower upfront costs and tie spending more closely to revenue.

Oracle stockpiled Nvidia GPUs early in the cycle. This gave the company immediate availability when competitors faced shortages. Once an AI model trains on Oracle’s networking setup, switching providers involves considerable engineering work.

Wall Street maintains a Moderate Buy consensus on Oracle stock. The rating is based on 25 Buy recommendations, 11 Holds, and one Sell. The average price target of $350.27 suggests 61% upside potential from current levels.

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