Oracle Escalates AI Spending, Sending Shares Plunging

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00:00We accept there's some anxiety. They are spending more than you lot thought they would.

00:06They have some growth. Where in the equation are they sitting for you?

00:13Yeah, I think right now it's a timing mismatch. I think they're getting overly penalized for

00:17a number of elements. I think there's kind of a vote of no confidence from this market

00:22around the ability to grow and serve OpenAI, both on the OpenAI front, quite frankly, and

00:30the Oracle front. And I think that's a mistake. We truly believe that compute demand at the

00:37moment is insatiable. It's not just insatiable for OpenAI. It's insatiable for other foundation

00:42model companies. It's also insatiable for other hyperscalers. I think even on the Microsoft

00:46call, they noted how much more demand that they had in the quarter for Azure that they

00:51couldn't supply. So we're pretty confident that the demand is real, that the demand is there.

00:57And we continue to see accelerating growth with the company stating pretty clearly they, A, expect to

01:04maintain investment grade credit. B, they don't believe they will need to spend more than and quite

01:11possibly significantly less than $100 billion in debt. And on OpenAI, A, they believe they're very much good

01:18for it, but that the demand is truly fungible. And if OpenAI can't make those commitments, there are a lot

01:23of other...

01:24No, no, I appreciate that. Negative free cash flow is $10 billion, right? And the debt pile you point

01:32out has hit $106 billion in debt. This chart is Oracle five-year CDS. Oracle CDS at the highest level

01:39since 2009, credit default swaps, the cost of protecting debt against default. It's a chart,

01:45but it's a reaction. And the three points you just made, clearly, there's a large portion of the

01:51market that doesn't share that viewpoint with you. Yeah, look, I think the CDS chart, I think it was

01:59important for Oracle to state that they expect to maintain investment grade credit worthiness. I think

02:06that there's also a number of flexible options that they presented on a call yesterday, like the bring

02:10your own chips, in addition to the ability for customers to lease. So I think that they are very

02:16vigilant about the level of debt that they're willing to take. They have a number of other

02:22options, including issuing equity. But at the end of the day, the overall CDS level is still relatively

02:30low for a company of Oracle size and stature. And we don't believe that that is indicative of

02:38any kind of risk for them to fail to meet their commitments.

02:44Alex, I loved your note. And I love the idea that you're saying this is a tough crowd,

02:48basically. But you did reiterate outperform, but you vastly decreased your price target from $400 to

02:54$275. Is that more because the market is just not going to push up the stock in the way that you

03:01actually think could be vindicated? Do you still think $400 could be vindicated? It's just the market's

03:04not going to go there. Yeah, I think it's two points. I think it's important to point out that, you know,

03:09since our last price target, the comps have compressed, the relative multiples have come down. And

03:14number two, look, we are vigilant of current performance as well. I think for the stock to work, you know,

03:21back to some of those more lofty angles, I think you need clear evidence of meaningful outperformance on

03:28cloud revenue and the IS side, not in line or slightly below. And as the confidence kind of

03:34returns to seeing those investments converting to revenue at higher and higher clips to where at this

03:41point, you know, it looks like Oracle is going to be the fastest growing mega cap software company. And

03:48it is the cheapest mega cap software company. So as those two things start to converge, I think you could

03:53get back to those lofty highs. Alex, what's so interesting about your coverage range is that

03:58you're a software guy. You're also looking at Adobe and we've just had Adobe numbers. But of course,

04:03Oracle has made this huge pivot into almost now infrastructure eclipsing its software revenue that

04:09it brings in now. But just taking a step back, the whole AI bubble debate and whether or not we're

04:14going to be good for productivity gains in the amount that we're currently spending. Do you think

04:19that there is a bubble or that we're in a fine kind of space?

04:24I think it's always hard to call a bubble when you're in the middle of it. We do see a tremendous

04:29amount of productivity enhancements that is happening in the industry. And I think depending

04:35on where you are and if you're what part you're looking at, you can have a completely different

04:39picture. I think at this point, if you're an engineer or if you're a software developer,

04:43you can't imagine life without agentic coding. You can't go back to a time when you weren't using

04:50one of those tools. And the availability, the abundance of compute is increasingly leading to

04:56a renaissance of software development and code creation. I think if you're kind of a traditional

05:01knowledge worker, you're still kind of waiting to see that 10x, 100x improvement in your capabilities.

05:07And I think that's natural because those things are a little bit more nuanced depending on where you

05:12work, what your role is, how much data, how much risk your firm is willing to take. So I think

05:17it's a natural progression. And folks have to remember, this is a journey. We are still way

05:23away from that destination, but it's an extremely exciting time to be in this space. And I do think

05:28that we are on an accelerating growth path for many of the companies that we cover.

05:33Alex, I'm going to recap just really quickly. Capital expenditures slightly ahead,

05:37a few billion dollars of where the street thought it would be,

05:40but impressive growth in cloud. The stock, a decline of 14% to 16% would be if we close this

05:47level down the most in 23, 24 years. Is Oracle good at technology, Alex, very quickly?

05:54Yeah, I think Oracle is great at technology. I think Oracle for multiple decades has been

05:59able to make the pivot to the new exciting secular domain. It takes time, like it did for Oracle in

06:07the cloud. I would argue that they've made the pivot to the AI compute cycle much faster. And I think

06:13over time that will serve in their favor as their ability to take their existing customers and convert

06:21those customers to both an AI cloud first and AI native world with a full stack experience, not that

06:28dissimilar for what from what Microsoft has done, will put them at the forefront of a lot of these secular

06:34waves.

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