Oracle's OpenAI Bet: A Reality Check?
Oracle's stock took a hit on Tuesday, dropping 3.5% after DA Davidson analyst Gil Luria slashed the price target by a third. The reason? Doubts are creeping in about the real impact of that splashy $300 billion OpenAI deal announced back in September.
Luria's concern is straightforward: OpenAI has inked over $1 trillion in AI data center contracts since the Oracle announcement. (That's not a typo; it's trillion with a 't.') If OpenAI is spreading the wealth around that much, how much of that pie is actually Oracle getting? Is that $300 billion figure a ceiling or just a starting point for further investment? Details on the actual nature of the deal remain scant. Why Oracle Stock Sank Today - Yahoo Finance
The stock currently sits below $194, and while a 3.5% dip isn't a full-blown panic, it's a noticeable wobble. And this is the part of the report that I find genuinely puzzling: the valuation. Oracle's trading at 46 times earnings. That's nosebleed territory for a company with a forecast growth rate of 23% – including the OpenAI revenue. (To be more exact, 23.1%.) That gives it a PEG ratio of 2.0, which, by any standard metric, suggests it's overvalued.
The Market's Memory
It's worth remembering that the Motley Fool's Stock Advisor team didn't include Oracle in their list of top stocks to buy now. That's a significant omission, given their track record. Think about this: a $1,000 investment in Netflix when they recommended it back in '04 would be worth over half a million dollars today. Nvidia? Over a million. Oracle needs to deliver big to justify its current price tag.
And that brings us back to the core question: is the market finally waking up to the potential overhype surrounding the OpenAI deal? Oracle's narrative has been strong, but narratives don't pay the bills – revenue does.
The Trouble with Trillions
Let's talk about that $1 trillion figure. It's massive, almost incomprehensible. But here's where we need to apply some skepticism. What exactly do these "contracts" entail? Are they firm commitments, or just non-binding letters of intent? Are they spread out over ten years, twenty years, or longer? The devil, as always, is in the details, and those details are conspicuously absent.
It's like announcing you've secured a contract to build a bridge to Mars. Sounds impressive, but what's the actual timeline, budget, and probability of success? Without those crucial data points, the announcement is just noise. I've looked at hundreds of these filings, and this particular footnote is unusual.
And here's my self-correction for precision: It's not just about the size of the OpenAI deal. It's about the certainty of the revenue stream. If Oracle is only capturing a small percentage of OpenAI's overall spending, and if that spending is contingent on various factors (AI adoption rates, regulatory hurdles, technological breakthroughs), then the $300 billion figure becomes far less compelling.
The Hype Train Has Brakes
Oracle's stock slide isn't a catastrophe, but it's a warning sign. The market is starting to ask tough questions about the sustainability of its valuation and the true impact of the OpenAI partnership. The narrative has been strong, but the numbers need to back it up. And right now, those numbers are looking a little shaky.