After hitting a record high with a record increase on September 10th of this year, Oracle... The stock price then began a continuous decline. Since the beginning of this month, the company has been hit by a series of negative news, further exacerbating external concerns about artificial intelligence. Concerns about industry prospects and valuation bubbles.
Oracle closed at $178.45 on Wednesday, down 5.4%, with a cumulative decline of 48.5% over the past three months. As a key driver of the US stock market bull run over the past two years, this sector remains crucial to the market's direction next year.
Oracle denies rumors of failed funding round.
According to media reports, Blue Owl Capital is investing in Oracle's $10 billion data center in Michigan. The project's financing plan has fallen through, with sources indicating that this stems from market concerns about Oracle's debt levels and spending. Following the news, the once-hot artificial intelligence (AI) stock plummeted. However, Oracle subsequently denied the report, stating that the project is progressing steadily.
In recent weeks, high-risk financing schemes related to corporate data center construction plans have been making investors uneasy. Oracle disclosed in its latest quarterly earnings report that as of November 30, the company's committed spending on data center leasing and cloud service capacity over the next 15 years reached $248 billion, an increase of nearly 148% from the figure in August of this year.
US Securities According to SEC filings, this cloud computing company The giant issued $18 billion in new bonds in September. As of the end of November, Oracle's total liabilities exceeded $124 billion, including operating lease liabilities. Currently, its credit default swap (CDS) yields are hovering near their highest levels since 2009.
The core of market concerns lies in the fact that some hyperscale cloud service providers are turning to private equity financing instead of bearing the costs of building data centers themselves, and that their leasing agreements may carry high risks. Oracle has now become the focus of market attention after refuting a report last week that claimed it had postponed some OpenAI-related projects to 2028.
On Wednesday, other stocks related to artificial intelligence also followed suit and fell. Chipmaker Broadcom... AMD Semiconductor fell 4.4%, with a cumulative decline of over 20% in the past five trading days, entering a technical bear market. AMD fell by more than 4%, also plunging into a bear market.
“We’ve clearly seen a very significant rotation in the market, with funds shifting from large-cap growth stocks to large-cap value stocks. I think this is actually investors adjusting their positions in preparation for next year’s market performance, moving towards a more defensive allocation,” said Brian Mulberry, a client portfolio manager at Zax Investment Management. “The real question in the market right now is: 'Who will profit from these massive AI investments?'”
Marbury predicts that the rotation of funds from overvalued stocks to "more reasonably valued sectors" will continue until 2026. He believes this trend, coupled with monetary policy uncertainty, could trigger some market volatility. "At this stage, it is crucial to focus on certain indicators to determine when and where the profit inflection point in the artificial intelligence field will occur. These indicators include free cash flow. Balance sheets can be manipulated, but free cash flow cannot be faked," he further analyzed. "What was once the biggest engine driving market returns has now become the biggest risk facing the market."
Is the bubble serious?
According to public reports and financial statements, data center spending commitments, a pillar of artificial intelligence applications, have continued to climb in recent quarters as tech giants increasingly sign agreements to lease server clusters. This includes Microsoft . Tech giants including Meta have pledged a total of $500 billion in data center leasing over the next few years, an astronomical figure that underscores the industry’s massive bet on artificial intelligence.
Amid the recent tech stock correction, debates about an AI bubble have begun to emerge. Firstly, there's the issue of over-investment and a cost-benefit imbalance, with the industry facing the dilemma of investment far exceeding short-term returns. OpenAI alone plans to invest $1.4 trillion over the next few years. The same applies to tech giants; Alphabet, Microsoft , and the other two have planned over $400 billion in AI-related capital expenditures over the next 12 months, largely for data center construction, but related revenue is far from covering costs. This "cash-burning for growth" model is highly dependent on external funding, and a funding gap could trigger a chain reaction of problems.
This leads to valuation concerns, with many companies' valuations severely detached from their fundamentals. For example, Palantir Technologies has a P/E ratio exceeding 180, and Snowflake's forward P/E ratio is close to 140. It's important to note that AI-related stocks account for a record proportion of Americans' stock holdings. In this crowded trading environment, a shift in market sentiment could easily trigger a collective stock price correction.
Finally, high-leverage financing may amplify risks, with cash-rich tech giants becoming major bond issuers, such as Meta and Amazon. Some companies rely on issuing massive amounts of bonds to support AI infrastructure. Others use special purpose vehicles (SPVs) for off-balance-sheet financing, creating implicit guarantees and contingent liabilities. This high-leverage model exposes risks rapidly and can spread throughout the entire industry chain when financing conditions tighten.
The Federal Reserve's policy path will be a key factor. If the Fed pauses rate cuts due to inflation not meeting its target, corporate borrowing costs will remain high. Given the current internal divisions within the Federal Open Market Committee (FOMC) and the uncertainty surrounding personnel changes within the Fed, market speculation regarding this year's monetary policy is highly divided.
Despite the numerous risks, Wall Street is not pessimistic about the industry's prospects. From the industry's perspective, tech giants are going "all in" on AI to avoid being left behind, continuously investing in the research and development of new models and the expansion of application scenarios. From the US government's perspective, the prosperity of the US stock market and the AI narrative can be linked to household wealth and the credibility of the US dollar.
A survey by CBN (China Business Network) found that institutions generally expect the S&P 500 index to continue its double-digit growth target next year. HSBC Citibank believes that the AI investment cycle will continue to support corporate profitability. They anticipate that the positive effects of AI investment will continue to materialize, although market focus will shift from AI-enabled companies to companies that actually use it.
(Article source: CBN)
