Hedge Funds Are Heavily Shorting This AI Stock: Should You Buy, Wait, or Avoid?

When a hedge fund or institutional investor shorts a stock, it means that they are essentially betting on the stock to go down. Every month, Hazeltree, a Treasury and liquidity management firm that tracks alternative asset managers, publishes a list of the most shorted stocks. In February, with the latest report, Hazeltree revealed that cloud-computing firm Oracle (NYSE: ORCL) was among the most shorted large-cap stocks in North America.

Oracle stock has been moving lower this year due to its high valuation, high AI spending and debt, and concerns about its reliance on OpenAI (which is unprofitable and has high cash burn, among other issues). Add to that the recent geopolitical conflicts, and Oracle's stock has been steadily moving lower since February. The stock is down about 29% year to date. Over the past year, its price has been effectively flat (down 1.3%), which significantly trails the S&P 500's 25% gain over the past year.

Furthermore, it did not make the list of AI stocks that hedge funds are buying the most, according to Motley Fool research.

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What is the temperature on Oracle stock now? Should investors buy, wait, or avoid it?

Oracle has lots of backlog, but also lots of debt

Oracle released its latest quarterly earnings in early March, and the results were strong. Yet, it barely moved the needle on the stock. After a slight uptick, it dropped back down, mired in the larger tech sell-off and exacerbated by geopolitical issues.

But the results were reassuring. Oracle saw earnings rise 24% year over year and revenue jump 22%. Additionally, cloud computing revenue increased 44%.

There were other promising signs. Its remaining performance obligations (RPO), corporate-speak for backlog, is a staggering $553 billion, up 325% year over year. But $300 billion of that is through a deal with OpenAI, so investors are concerned about whether or not it will all come to fruition.

It also expects revenue to grow 19% to 21% year over year in its fiscal fourth quarter (currently underway), with cloud revenue rising 46% to 50%. Earnings are anticipated to rise 15% to 17%. For the full fiscal year, Oracle anticipates $67 billion in revenue, which would be up about 17% over the last fiscal year. In 2027, it projects $90 billion in revenue, which would be 34% higher than this fiscal year.

On the other hand, Oracle has tons of debt -- about $162 billion as of the latest quarter. Its debt-to-equity ratio is a staggering 415%, which is really high. It also announced plans to raise another $50 billion in financing this year, but said it wouldn't issue any additional bonds beyond 2026. So, while the revenue pace will be strong, much of it will go to pay down the debt, and that could be a drag on earnings.

So, when you consider the pluses and minuses, is Oracle a buy right now? While the debt is concerning, I think the concerns about OpenAI failing to fund its obligations are overblown. Ultimately, Oracle stock is really cheap right now, trading at 26 times earnings and 18 times forward earnings. It has a five-year price/earnings-to-growth (PEG) ratio of 0.93, which suggests it is a long-term value.

It should be on your radar as a potential long-term buy, though be mindful that tech stocks remain highly volatile right now.

Dave Kovaleski 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.