Oracle has been actively investing in infrastructure and forming strategic partnerships to strengthen its position in the competitive AI market. However, despite these efforts, there are concerns about the rich valuation of the company given the challenging landscape it operates in. Investors are increasingly wary of the risks associated with AI investments, such as revenue uncertainty, integration challenges, and tough competition from rivals with more advanced AI capabilities.
The recent performance of Oracle’s stock reflects the apprehensions surrounding its AI investments. The stock broke below a crucial support level at $135, and although it has bounced back, it now faces resistance at that level. The relative performance of Oracle compared to the S & P 500 index indicates a higher likelihood of a downward movement rather than a breakout above the resistance. Additionally, the negative momentum suggests a further downside for the stock.
When delving deeper into Oracle’s business metrics, it becomes evident that the company might be overvalued. Trading at 30 times forward earnings, Oracle carries a significant premium compared to its historical median of 20 times. This inflated valuation is driven by the optimism surrounding the growth potential of its AI servers. However, there are signs of moderation in the pace of new contract acquisitions, despite the initial success with OpenAI and Fortune 500 companies.
Oracle’s expected EPS growth rate of 14% falls short when juxtaposed against its competitors. Companies like META and AMZN are projected to achieve growth rates of 21% and 37%, respectively. This disparity raises concerns about Oracle’s ability to remain competitive in the AI market and sustain its growth trajectory.
The recent cancellation of a substantial cloud computing deal with Elon Musk’s xAI has raised doubts about Oracle’s ability to secure and retain high-profile contracts. This development adds to the uncertainty surrounding the company’s revenue streams and market positioning, further contributing to the downward pressure on its stock price.
In light of the potential weaknesses in Oracle’s stock, there is an opportunity for options trading to capitalize on the anticipated downside. One possible strategy is to acquire the October $130/$120 Put Vertical for a $2.68 Debit. This entails buying the October 18 $130 Puts at $5.38 and selling the October 18 $120 Puts at $2.70. The maximum profit on this trade is $732 per contract if Oracle falls below $120 at expiration, with a maximum risk of $268 per contract if the stock remains above $130.
Oracle’s aggressive investments in AI infrastructure and strategic partnerships have positioned the company to compete in the AI arms race. However, concerns about overvaluation, slow contract acquisition pace, modest EPS growth rate, and cloud computing deal cancellations raise doubts about Oracle’s ability to maintain its market position and sustain growth. Investors should carefully consider these factors before making any financial decisions regarding Oracle’s stock.