It really does feel like Oracle (NYSE:ORCL | ORCL Price Prediction) can’t hit rock bottom. Thus far, the bottom has proven quite elusive for the software company and AI infrastructure fast-mover, and while the pool of potential buyers has seemingly evaporated as concern over AI-related CapEx turned into panic, I still think that deep-value investors have plenty of reason to give the name a second look, especially now that some of the beaten-down software names are showing signs of life after a timeout period that followed the first-half SaaS-pocalypse.
Indeed, there’s still quite a lot of debt on the balance sheet, enough for its credit rating to take a hit, now sitting at one grade above junk. And, of course, there’s the nightmare scenario that sees Oracle’s advanced AI data centers sitting mostly unutilized as OpenAI’s ability to pay comes into question.
Don’t discount the backlog excessively
Either way, I do think that there’s a bit of irrational fear that’s in the driver’s seat of Oracle shares right now. One star analyst in Gil Luria over at D.A. Davidson stated that Oracle’s massive backlog gets “no credit.”
I’d take it a step further by arguing that the explosive OCI-driven backlog is pretty much coming for free, with shares going for under $130 per share. Will there be pain to get to where Oracle needs to be to reinvent itself for the AI age (it’s a must for the software titan, in my opinion)?
Most definitely. It’s never fun to raise so much debt that one’s credit rating suffers. And it’s certainly not ideal to have to cut thousands of jobs while running the risk of diluting shareholders. But, at the end of the day, if the AI revolution is a “go” and OpenAI, whose financials could be in better shape, ends up being able to pay (it’s far likelier than not), Oracle may very well be the big gainer that many analysts envision it as, especially as investors look to consider value plays across AI that aren’t the memory chip names or semi designers.
That backlog could be worth its weight in cash
Oracle’s backlog is in the books. Yet, it seems like nobody is taking it as money in the bank. At this juncture, questions linger as to whether Oracle can keep raising cash to maintain such an aggressive pace and whether the firm can execute on its ambitious roadmap. Whether it’s OpenAI’s ability to pay or Oracle’s ability to execute, there’s no shortage of scenarios for the bears to get behind.
In my view, Oracle might have what it takes to put in a bottom, even before the swelling backlog begins to really convert. Shares are going for just north of 21.0 times trailing price-to-earnings (P/E). And after a nice 8.3% bounce (a long overdue one) on Thursday, I do think the latest signs of life are worth getting behind.
Hyperscalers are flooring it, and AI compute demand may very well still be in its early days. While the cash burn, credit downgrades, third-party risk, fears, and doubts will linger for another year, I do think that shareholders staying the course stand to be very handsomely rewarded as the firm gets everything up and running, gets paid, and, eventually, repeats.
Once that early heavy-lifting is done and over with, I do view Oracle as one of the new utilities for the AI age, encompassing critical chokepoints in the buildout, from energy to cooling and everything in between.
The bottom line
Levering up, diluting shareholders, and overspending, I think, seems reckless on the surface, especially considering where the stock has fallen. However, once the tides turn (if all goes according to plan) and the firm finds itself soaring into free cash flow positivity in a hurry, with enough cash to keep building, and the flexibility to chip away at the debt and move ahead with buying back stock, the shares might just correct the upside in an equally vicious way.
At the end of the day, you’ve got to build the flywheel before you can get it spinning at full speed! And with smart people like Luria claiming the market’s valuing the backlog at “zero,” and maybe even negative, perhaps it’s time for investors to give the risk/reward a second look as Larry Ellison’s grand plan looks to come to fruition.
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