Amidst growing concerns over a potential credit bubble within the artificial intelligence industry, financial experts on Wall Street are increasingly advocating for an unconventional hedging tactic: shorting shares of Oracle Corporation (ORCL). This strategy is viewed as a pragmatic, albeit indirect, approach for investors to mitigate exposure to the inherent credit risks associated with smaller, privately-held AI infrastructure enterprises.
According to Ali Meli, Chief Investment Officer at Monachil Capital Partners, Oracle has emerged as a 'cost-effective stand-in' for investors aiming to speculate against the financial stability of AI infrastructure companies like CoreWeave Inc. The rationale behind this strategy lies in the prohibitive costs and illiquidity associated with directly hedging the debt of such private entities through traditional instruments like Credit Default Swaps (CDS). Oracle's aggressive expansion into data center development, often catering to these same burgeoning AI startups, positions its stock as a more accessible and liquid avenue for investors to voice bearish sentiments regarding the sector's financial underpinnings.
A critical element amplifying Oracle's risk exposure is its deep entanglement with OpenAI, a prominent AI entity and Oracle's largest client. Meli points to financial disclosures from Microsoft Corp. (MSFT) indicating that OpenAI is reportedly experiencing significant quarterly losses, approximately $12 billion. This lack of transparency surrounding OpenAI's financial health presents a considerable hazard for Oracle. Should OpenAI encounter liquidity challenges or default on payments, Oracle could face a severe operational predicament, including billions of dollars in contracted data center facilities that may prove difficult to reallocate to other clients.
Furthermore, Oracle's own financial statements are exhibiting signs of stress. Meli highlights a dramatic surge in Oracle's capital expenditures, which have more than tripled from $6 billion to $20 billion over the past six months. This rapid expansion has been largely financed through debt. Consequently, Oracle's credit spreads are widening, a clear signal from bond markets that they are becoming increasingly wary of the company's swift, debt-fueled growth trajectory.
In the past half-year, Oracle's stock has seen a decline of 15.74%, though it has posted an 18.12% increase over the full year. The stock closed recently at $195.71 per share, reflecting a marginal uptick. Despite the yearly gains, the company's price trend remains weak across short, medium, and long-term horizons, underscoring a poor value ranking as per independent market analyses. This complex interplay of strategic investment, customer reliance, and escalating debt paints a nuanced picture of Oracle's current market position.