Why Did Oracle Stock Drop After Today's TikTok News?
Key Points
The Trump Administration lifted a federal ban on TikTok today.
Oracle leads a coalition of companies that bought majority control of TikTok this year.
But Oracle is also an AI company -- burning massive amounts of cash.
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Oracle (NYSE: ORCL) shareholders got some good news today: The Trump Administration has lifted its ban on the TikTok app on federal government-owned electronic devices and removed the threat of a complete ban in the United States.
Following a Justice Department opinion last month that deemed a U.S.-owned TikTok no longer a worrisome "covered application," suspected of abuse by Chinese cyber-spies, the White House Office of Management and Budget today canceled a 2023 directive banning the app from government devices.
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Then Oracle stock dropped 4.1% (through 1:40 p.m. ET).
Image source: Getty Images.
Wait. What?
I know, right? This sounds like good news for Oracle, which, alongside private equity firm Silver Lake and other investors, has taken a majority stake in TikTok and seems set to profit from the popular social media app.
In addition to allaying cyber-spying concerns, the Justice Department has cleared TikTok for use because, with Oracle and the other investors now controlling the company and its content recommendation algorithm amended, TikTok is believed no longer able to "promote specific narratives or spread false information" in the U.S.
So all systems should be go for Oracle.
Oracle's bigger problem
Problem is, Oracle isn't just a software company that owns a popular social media subsidiary. Since agreeing to provide massive amounts of artificial intelligence capacity to companies, including OpenAI, Oracle is now viewed as an "AI stock" in its own right.
Building out the infrastructure to provide this capacity turned Oracle's free cash flow negative last year. This year, the company is expected to burn nearly $24 billion in cash -- with the potential to keep on burning cash for the next three years.
Even owning TikTok won't change the fact that Oracle has turned itself into a cash-burning machine. Even owning TikTok... may not be enough to save Oracle stock.
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Rich Smith 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.
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