ORCL $638B RPO Faces AI Spending Surge & MSFT, GOOGL, AMZN Competition

SPEAKER_1 (0:00)

Let's go deep now on a big name, and that is ORCL, and preview today's earnings report in our tech spotlight. John Blank, Chief Equity Strategist and Economist. Zach's Investment Research is with us. And I think about ORCL, and I remember a year ago where they had one report where the stock was up 30 percent, and wow, that was a lot of fun. But look, we saw a selloff.

We see selloffs and rallies when it comes to this. There were two selloffs in the last few. So what do you think is happening here? The options market is actually getting a lot on volatility.

John Blank (0:34)

I think so, Nicole. We have to remember that this is a 1.7 beta stock and we got almost a 5 percent tenure, likely going to get a 5 percent tenure in the next week or two. So that's going to kill the high beta names no matter how well the fundamentals show up for Oracle today. So that's the story for Oracle. The other thing you have to think about is this is a balance sheet trade as much as an earnings statement trade.

So they can beat the 174 today that we have in our system for consensus on the quarterly earnings. But they're basically just above investment grade as a bond credit. And this is another one of those issues when rates are rising at a third credit spread on top of the rate for the real price that Oracle is going to pay for their financing for all this growth. And that's the bear case. So 150 from the 300 highs is the bulk case that this is a stock that's been beaten down 50 percent last year or so, and you can get it to come up. But these are the two caps. And frankly, with the 10 year where it is, Nicole, I'm with what the day traders are doing today, which is selling Oracle, not buying it.

SPEAKER_1 (1:38)

I see. OK. I mean, I know they have the implied volatility of about 11 percent, but they expect volatility going forward with actually, I saw selling calls in the 150 strike now, October, November, December. So a little more bearish than neutral.

It's mixed. I mean, I know it's on very heavy volume, at least two times what would be on a normal day. Now, we've seen this transformation going from a software company, legacy software company into a cloud giant. How are they doing on that end?

John Blank (2:11)

Well, look, they're a 400 billion dollar market cap company, and they're going to do 68 billion in revenue this year. They're trying to get to 130 billion or more in revenue by 2020

This is the cloud growth that they're going to supply to basically half of it is open AI. This is the story of the market is going to be told about the open AI in front of their IPO, and they're trying to put the investment in place to serve that growth that Chet, GPT and the other AI groups are going to deliver. You got to believe that story and you can get a double growth in revenues, not earnings in the next two years, or you think that's just way too optimistic. When the stock's been selling off, Nicole, the calls are below the actual market price now. The market is still betting that they're not going to deliver that growth, and it's more optimism than they want to swallow.

SPEAKER_1 (3:08)

We also have to remember that cloud infrastructure profits are often less than software products. That's another element. But as it transforms into the AI world and has the open AI partnership, and sometimes sentiment varies on open AI.

Does that affect how people view Oracle?

John Blank (3:28)

Absolutely. The one thing that's the bulk case for this whole open AI connection is they have upgraded their AI agent towards the cloud level, which was their big beef out there in the marketplaces. Cloud was inanthropic, were the marquee enterprise area for the presence. It did look like they had the wrong partner up until a few weeks ago when they announced an upgrade to their AI capabilities to the cloud level.

That is what Oracle wants to be. They want to be the enterprise AI choice of the marketplace. Problem they have here is we've got Azure, you've got Google Cloud, you've got the Amazon Web Services, and these groups are multi-trillion hour groups, and cloud is a scale business. And if the question you have to ask yourself is, in an oligopoly situation where you're not the big player and people can undercut your price, if the margin erosion and the loss of business to these cloud enterprise groups that are basically the hyperscalers is gonna take Oracle down. That's the other bear case.