Why Oracle Stock Slipped 35% in June

Shares of Oracle (NYSE: ORCL) sank 35% in June, according to data from S&P Global Market Intelligence. After rebounding in May, the database and software provider turned artificial intelligence (AI) cloud solution reported earnings in June that disappointed investors.

Oracle is now down 56% from its highs and trades at a below-market price-to-earnings ratio (P/E). Here's why the stock was falling in June, and whether it is a buy today.

Cash burn and capital raises

In the last few years, Oracle has pivoted its business from selling just database solutions and other software to becoming a fully cloud infrastructure company, spending billions on data centers to do so. With major partnerships from the likes of OpenAI and other AI players, Oracle now has remaining performance obligations (RPO) of $638 billion, up $85 billion from last quarter.

Revenue was up 20% in constant currency, driven by 92% growth in cloud infrastructure solutions to $5.8 billion. Oracle is aggresively trying to gain market share from the original cloud giants like Amazon Web Services (AWS), and is now outgrowing them on a % basis, albeit still with much smaller revenue levels.

The problem investors have with this build-out is that Oracle has turned itself from a cash gusher into a cash-burning incinerator. Over the last 12 months, Oracle has burned $24 billion in free cash flow and is planning to raise $40 billion this fiscal year to fund its infrastructure build-out. With over $100 billion in debt on the balance sheet in May, adding more leverage to this business with unproven profitability in this new cloud segment has investors nervous.

Image source: Getty Images.

Should you buy the dip?

Oracle can claim a massive backlog because of its large contracts with AI players like OpenAI, but this does not prove anything financially about its ability to run a profitable cloud business. It is possible that Oracle is winning these contracts by underbidding competitors like AWS, which has historically been very cost-disciplined.

We can see this on the income statement. Overall, Oracle's cloud expenses are growing much faster than cloud revenue, which is why operating income was only up 13% in constant currency last year. This puts the stock in a different perspective. Combined with the heavy cash burn at the moment, it is no wonder that it has been cut in half over the last few quarters.

If this AI boom eventually turns into an AI bust, Oracle's business may be in trouble. It is probably smart to avoid buying the dip on this big tech stock today.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.