Top Analyst Says Oracle's 'Irresponsible' AI Bet Differs From 'Healthy' Microsoft And Google Demand: A 'Bad Business' With 'Very Low Margins'

D.A. Davidson's Gil Luria criticized Oracle's AI strategy as an "irresponsible investment," asserting the company is borrowing to fund speculative demand from startups, contrasting it with rivals' customer-driven buildouts. Luria highlighted the new AI business's "very low margins" (30-40%) compared to Oracle's core 80% gross margins and questioned the validity of its $455 billion order backlog, particularly the OpenAI deal, which short seller Jim Chanos noted doesn't begin until 2027 and faces financing doubts. This skepticism contributed to Oracle's recent stock decline, with its AI-driven appreciation having "completely gone away," despite the stock's year-to-date outperformance against the S&P 500.

Analysis

D.A. Davidson's Head of Technology Research, Gil Luria, has strongly criticized Oracle's (ORCL) AI strategy, labeling it an "irresponsible investment" driven by speculative demand from startups, contrasting it with the "healthy," customer-driven AI buildouts of rivals like Microsoft (MSFT) and Amazon (AMZN). Luria highlights Oracle's high-risk approach of "borrowing to provide capacity" for these startups, unlike Big Tech competitors who possess existing customer bases and cash reserves.

A A key concern is the significantly lower profitability of Oracle's new AI business, which Luria notes operates at 30-40% gross margins, a stark contrast to the 80% gross margins of its core business. Furthermore, Oracle's substantial $455 billion order backlog, including a $300 billion OpenAI deal, faces intense scrutiny, with Luria dismissing these as "false promises" and short seller Jim Chanos questioning the deal's 2027 start date and OpenAI's ability to finance a $60 billion annual commitment.

The analyst's skepticism suggests that Oracle's recent AI-driven stock appreciation, which has "completely gone away," was unwarranted, despite the stock's 36.72% year-to-date outperformance against the S&P 500. Oracle's stock closed 3.88% lower on Wednesday and declined further in pre-market trading, reflecting growing investor caution regarding the sustainability and profitability of its AI initiatives.

Key Decisions for Investors

• Investors should critically re-evaluate the quality and sustainability of Oracle's $455 billion order backlog, particularly its AI-related components, given analyst concerns about speculative demand and low margins.
• Monitor Oracle's actual revenue and profitability metrics from its AI segment in upcoming earnings reports to assess if the reported 30-40% gross margins are sustainable and contribute meaningfully to overall company performance.
• Consider the potential for increased short interest or continued stock price volatility as market participants digest these criticisms and scrutinize the long-term viability of Oracle's AI investment strategy.