Why Shares of Oracle Are Sinking Today
Key Points
Oracle recently reported disappointing earnings.
Broadcom's backlog of orders failed to excite artificial intelligence investors.
Investors are concerned about valuations, intense spending on AI-related infrastructure, and whether these investments will pay off.
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Shares of cloud giant Oracle (NYSE: ORCL) traded over 5% lower, as of 12:04 p.m. ET today. The company continued to slide, as more concerns over artificial intelligence emerged following the release of Broadcom's earnings report last night.
From AI star to AI concern
With Oracle's stock now trailing the broader market, it's easy to forget that just a few months ago, Oracle reported one of the year's most impressive earnings reports, which sent shares surging by some 40%. The stock surged after the company reported over $450 billion of remaining performance obligations, driven by demand for Oracle's AI cloud solutions, which are delivered through the company's global data center network.
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Image source: Oracle.
However, Oracle has given back those gains after investors began to realize how much debt the company would need to take on to complete its data center buildout, and on reports that Oracle's AI data center solutions have been operating under extremely thin margins.
Those concerns sent shares down again after the company reported earnings earlier this week that fell short of expectations on revenue. Management also significantly hiked its guidance for capital expenditures by 40%.
Investors had more concerns this morning after the chipmaker Broadcom reported earnings last night. The company's backlog for AI-related orders, which management described as a minimum of $73 billion, clearly disappointed investors.
Oracle will be heavily impacted by AI sentiment
Given its ambitious AI business, Oracle's stock is likely to live and die by investor sentiment toward the AI sector, at least in the near term. Broadcom's earnings did little to keep investors excited in a sector that has now set a very high bar.
Ultimately, I think the stock will remain volatile in the near term. Long term, I still think the stock can work, but Oracle must now prove to the market that all of its planned investments will yield strong returns.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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