TLDR
- Morgan Stanley cut Oracle’s price target 30% from $320 to $213 over concerns AI infrastructure spending will miss earnings targets
- Oracle’s debt ballooned from $71 billion to $105 billion over five years to fund transformation into AI cloud provider
- Investment bank warns credit markets haven’t priced in Oracle’s higher funding and leverage needs from GPU buildout
- Guggenheim holds firm with $400 target, viewing Oracle as decade-long investment despite near-term challenges
- Wall Street consensus shows Strong Buy with $302.41 average target, implying 70% upside from current prices
Oracle got hit with a major downgrade Friday as Morgan Stanley cut its price target by 30%. The new $213 target represents a sharp drop from the previous $320 estimate.
Analyst Keith Weiss maintained his Hold rating but raised serious concerns. The GPU-as-a-Service expansion looks costly. Weiss believes the buildout will push earnings per share below Oracle’s stated targets.
The stock trades at $173.80 after falling 26% over six months. Weiss’s new target suggests about 17% upside potential. That’s far below most Wall Street estimates for the company.
Morgan Stanley’s main worry centers on funding requirements. The AI infrastructure push demands massive capital investment. The bank’s calculations show credit markets aren’t fully pricing in Oracle’s increased leverage needs.
Oracle has borrowed aggressively to fund its AI ambitions. Total debt jumped from roughly $71 billion five years ago to around $105 billion today. The company now carries a debt-to-equity ratio of 4.4.
Bond Sale Sparks Lawsuit
The recent $18 billion bond sale created unexpected problems. Bondholders filed a class action lawsuit in Manhattan court. They claim Oracle failed to disclose plans to sell more debt for AI infrastructure expansion.
The legal battle adds another layer of uncertainty for investors. Questions remain about how much additional funding Oracle needs. The lack of transparency in the bond offering raised red flags.
Morgan Stanley went beyond just cutting the stock price target. The firm recommended clients sell Oracle’s benchmark bonds. They suggest buying credit default swaps instead as protection against rising default risk.
The investment bank sees a disconnect between stock and credit markets. Stock prices appear to reflect funding concerns. Credit spreads don’t adequately price in the higher leverage risks ahead.
Guggenheim Sees Different Future
Guggenheim analyst John Difucci takes the opposite stance. He reaffirmed his Buy rating this week with a $400 price target. That implies 123% upside from current levels.
Difucci calls Oracle a “decade stock” worth holding long-term. He expects exponential EPS growth rates to materialize eventually. Short-term funding pressures don’t change the overall investment thesis in his view.
The gap between Morgan Stanley and Guggenheim reveals deep disagreement on Wall Street. One analyst sees mounting debt problems. The other sees a transformative AI opportunity worth the investment.
Oracle posted 11.07% revenue growth over the past twelve months. Analysts forecast continued profitability this year. The company gets a “fair” financial health rating from most research firms.
Strong Buy Rating Holds
Despite Morgan Stanley’s caution, Wall Street maintains optimism. Oracle carries a Strong Buy consensus rating. That’s based on 24 Buy ratings and eight Hold ratings from 32 analysts polled over three months.
The average price target sits at $302.41 across all analysts. This suggests approximately 70% upside potential from current trading levels. Morgan Stanley’s $213 target sits well below this consensus view.
Oracle secured regulatory wins this week. Both China and the United States approved the TikTok deal. ByteDance will sell TikTok’s US operations to a group led by Oracle and Silverlake. The transaction should close soon.
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