Why Oracle Stock Sank Today

Oracle Corporation (NYSE: ORCL) stock slid 3.5% through 2:45 p.m. Tuesday.

Investors can blame that on DA Davidson analyst Gil Luria, who this morning kept his rating on Oracle stock at neutral... but cut his price target on Oracle stock by 33%. As of today, Luria values Oracle at just $200 a share.

Davidson disses Oracle stock

Admittedly, this doesn't sound too bad. Oracle stock costs less than $194 today, so a $200 price target still implies Oracle stock will go up, not down. But consider what Luria has to say about Oracle stock, and you'll see why this cut is more than a little worrisome:

"When Oracle reported earnings on 9/9, the company made it seem like several customers represented the increase in [backlog], yet we found out the next day that OpenAI represented almost the entire increase. ... At the time, [Oracle's $300 billion 5-year contract] was by far OpenAI's biggest commitment, and made Oracle seem like the winner of a bake-off."

Since then, OpenAI has announced more than $1 trillion in AI data center contracts, and Luria says this means OpenAI is "not a serious counterpart and that Oracle was a pawn in the grand game of fake it 'till you make it."

Is Oracle stock a sell?

Luria worries about Oracle's valuation -- and so do I. In fact, I warned Oracle looked too expensive back when this contract was announced, and the stock cost $328 a share.

40% in losses later, I still worry.

Oracle stock costs 46 times earnings today, but its forecast growth rate -- including OpenAI revenue -- is only 23% per year. That's a PEG ratio of 2.0, at the extreme end of what a value investor might call a "fair price." If the OpenAI orders don't materialize, Oracle will clearly be a sell.

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.