On Wednesday, Oracle (ORCL) will release its quarterly earnings after the bell. Wall Street is keeping a tight eye on the cloud company's performance to see if the AI bubble is beginning to pop. Before the bell on Wednesday, Oracle's stock increased by 1%.
Consensus predictions of analysts monitored by Bloomberg predict that the rapidly expanding AI player will report earnings per share of $1.64 for its fiscal second quarter, up from $1.47 the year before. Oracle is expected to post $16.21 billion in sales for the quarter, a 15% increase over the same period last year.
Additionally, Oracle Cloud Infrastructure (OCI), the tech company's closely regarded AI division, is anticipated to record a 68% increase in revenue to almost $4.1 billion.
According to a Bloomberg index of the big IT stocks, Oracle's stock has fallen 33% from a high of $328 in September, while the "Magnificent Seven" have collectively gained more than 11%.
The company's enormous, AI-fueled RPO, or remaining performance obligations, a gauge of future revenue from customer contracts, surged roughly 360% to $455 billion in the first quarter, driven by a $300 billion deal with OpenAI (OPAI.PVT). This fall, Oracle stock peaked as Wall Street praised the company.
However, given that the ChatGPT developer has incurred expenses far higher than its anticipated revenue, investors were alarmed by Oracle's excessive reliance on OpenAI to meet its aggressive revenue objectives, which caused shares to decline.
Oracle has also focused on more general concerns about an AI bubble, as investors become more worried about the growing use of debt to finance data center expansions by tech companies and the entanglement of businesses involved in the AI boom through multibillion-dollar circular financing agreements.
As of the most recent quarter, Oracle's total debt was over $105 billion. Due to its massive investments in artificial intelligence, the company has issued nearly $25.8 billion in corporate bonds this year alone.
Investors are concerned that the tech rise has depended too much on speculative future returns and has driven firm valuations above what their fundamentals support due to the growing use of debt to finance capital expenditures in the AI race.
"ORCL [Oracle] has been the battleground for AI debt concerns," noted Brent Thill, a Jefferies analyst, in a report dated November.
According to Bloomberg composite ratings from major credit agencies, Oracle's debt is seen as riskier than that of its peers; its bonds have a BBB rating, while those of Meta (META), Amazon (AMZN), and Alphabet (GOOGL) are AA-, AA-, and AA-, respectively.
According to Intercontinental Exchange (ICE) data provided to Yahoo Finance earlier this month, the cost of insuring Oracle's debt against default, as determined by its credit default swap pricing, increased to its highest level since 2009.
Oracle has increased its debt at the same time that its expenses have increased. The company's capital expenditures increased from $2.3 billion in the previous year to $8.5 billion in the first quarter.
In a different letter this week, Thill stated, "Concerns around ORCL's ability to fund its aggressive AI-driven capex plan have intensified."
Despite the stock's recent decline, he stated that he sees "more upside than downside" for it. Regarding Oracle's growing expenses, JPMorgan analyst Mark Murphy stated: "[U]ltimately we view this as a trade-off for potential revenue growth in the longer term we believe investor sentiment may remain positive as long as OCI growth continues to outpace that of the major hyperscalers." According to Bloomberg statistics, options trading suggests that shares could move 10% in either way after Oracle's earnings.
