Oracle Stock (ORCL) Downgraded as Analyst Flags Overvaluation in Cloud Business

Oracle Corporation (ORCL) is under pressure after a major analyst initiated coverage with a Sell rating, casting a shadow over the company's cloud revenue valuation. The downturn follows Rothschild & Co Redburn's analyst Alex Haissl starting coverage of Oracle with a “Sell” rating and a price target of $175. The analyst believes the market significantly overestimates the value of Oracle's contracted cloud revenues.

The firm argues that Oracle's role in single-tenant, large-scale deployments more closely resembles that of a financier than a cloud provider, leading to economics that differ from the model of cloud companies. Rothschild's analysis suggests Oracle's five-year cloud revenue guidance equates to $60 billion in value, implying the market is already pricing in a risky, optimistic scenario that may not materialize.

This bearish sentiment contrasts with recent positive news surrounding Oracle, including a potential $20 billion AI cloud computing deal with Meta and an upgraded cloud revenue forecast. Just weeks prior, Oracle significantly increased its forecast for Oracle Cloud Infrastructure (OCI) revenue, now expecting 77% growth this fiscal year to reach $18 billion, up from a previous projection of 70%.

The company also anticipates OCI revenue will rise to $144 billion over the next four years, driven by surging demand for cloud services. This optimistic outlook had previously led to a 23% after-hours jump in Oracle shares, demonstrating the market's sensitivity to cloud growth prospects.

Adding to the complexity, Oracle recently announced plans to raise $15 billion through corporate bond sales to fund the expansion of its cloud infrastructure, specifically to meet the growing demand for AI services. The debt will be offered in up to seven tranches, with proceeds potentially used for general corporate purposes, including stock buybacks, debt repayment, and acquisitions. Following the announcement, Oracle's shares declined by nearly 2%, reflecting market apprehension about increased leverage.

Furthermore, Oracle recently underwent a significant leadership transition, with Clay Magouyrk and Mike Sicilia appointed as co-CEOs, succeeding Safra Catz, who transitioned to the role of Executive Vice Chair on the Board of Directors. This shift reflects Oracle's continued focus on AI and cloud infrastructure, areas where both new leaders have substantial experience. The market's reaction to this announcement was mixed, with some viewing the change as a positive step towards innovation, while others expressed concerns about potential disruptions during the transition.

The combination of a new “Sell” rating, concerns over cloud revenue valuation, increased debt, and leadership changes have created a challenging environment for Oracle's stock. While the company has demonstrated strong growth in its cloud infrastructure business, the market appears to be reassessing its long-term potential and profitability. The current price action suggests a recalibration of market expectations, potentially leading to further volatility in the near term.