Why Oracle Stock Dropped Today
Key Points
Oracle faces legal action from bondholders who claim the company withheld critical information when it raised nearly $20 billion in capital this September.
The market is pricing Oracle bonds as riskier than its official credit ratings suggest.
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Shares of Oracle (NYSE: ORCL) fell on Wednesday, finishing the day down 4.3%. The drop came as the S&P 500 and Nasdaq Composite declined as well, falling 0.6% and 1%, respectively.
Oracle bondholders are suing the company, claiming the tech giant failed to disclose that it would need tens of billions more in debt to build artificial intelligence (AI) infrastructure for its OpenAI contract.
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Oracle's massive raise was followed by an even larger raise
Oracle announced a $300 billion, five-year deal in September to supply OpenAI with computing power. Two weeks later, the company raised $18 billion through bonds and notes. Then, just seven weeks after that initial offering, Oracle raised an additional $38 billion to fund two data centers supporting the same OpenAI agreement. Bondholders from the initial $18 billion raise say they should have been informed that the company would need to return to capital markets almost immediately for such a large raise.
Image source: Getty Images.
The market is wary of Oracle bonds
Given the back-to-back massive raises, despite retaining their investment-grade ratings, Oracle bonds are trading at levels comparable to junk bonds, and credit default swaps (essentially insurance against a company defaulting on its debt) have reached highs not seen for Oracle since the great financial crisis.
Oracle is highly leveraged, relying on expensive debt to fund its rapid buildout of AI data centers. It's an extremely risky play that requires AI demand to continue growing at a lightning pace. I would not own the stock.
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Johnny Rice 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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