It’s been quite a ride for investors this year. After an early sell-off, the S&P 500 is up about 21% from its low in March, while the tech-heavy Nasdaq Composite is once again setting records, topping 27,200 just last week.
But a lot is happening all at once. With global instability, elevated oil prices, and bond yields at nearly two-decade highs, some investors are nervous that the recent run will reverse.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
If that happens, and a bear market — a 20% drop in the stock market — comes, I think a major slowdown in AI spending will play a key part. Here are two stocks I think will fall much further, and one that will fare far better than most.
Oracle’s backlog comes with a heavy debt load
On the surface, Oracle (NYSE: ORCL) looks incredible. Sales for its Oracle Cloud Infrastructure (OCI) arm — the part building and leasing huge AI data centers — jumped 121% to $7.4 billion in its most recent quarter. The company’s remaining performance obligations (RPO) — contracted revenue for services it hasn’t delivered yet — reached an incredible $664 billion.
But nothing is free, especially in the data center business. Oracle has to actually build the capacity to deliver on those contracts, and that takes a whole lot of cash. Oracle’s free cash flow (FCF), the money left over after running the business and paying for things like construction and hardware, was negative $5.4 billion in the latest quarter.
That’s a serious shortfall, and it comes even after a program of cost-cutting and significant layoffs.
To fund the difference, Oracle has turned to the debt market. At the end of August, it had $125 billion in long-term debt, plus $288 billion in data-center lease commitments that had not yet begun and aren’t yet on its balance sheet.
Oracle is currently spending $1.4 billion every quarter on interest alone. The cash it earns from its operations is $23.1 billion.
While its mix of customers has expanded, Oracle is heavily dependent on a single customer that is, in turn, in a tenuous financial position: OpenAI. The ChatGPT maker is committed to spending $300 billion during the next five years, and as of its latest leaked financials, it had a loss of $12.3 billion last quarter.
That means a serious portion of Oracle’s RPO relies on a company that could have trouble paying.
