Analyst Seeing 38% Downside for Oracle (ORCL) Explains Its ‘Risky Blue Sky’ Scenario

Core Viewpoint - Analysts are expressing concerns about Oracle Corp's (NYSE:ORCL) valuation and the perceived risks associated with its OpenAI deal, suggesting that the market may be overestimating the potential benefits while overlooking significant risks [2][4]. Group 1: Analyst Ratings and Price Targets - Rothschild and Redburn analyst Alex Haissl has a Sell rating on Oracle with a price target of $175, indicating a potential downside of approximately 38% from the stock price as of September 29 [2]. - The analyst believes that the market is overly optimistic regarding Oracle's OpenAI deal and is ignoring the associated risks [2][4]. Group 2: Business Model and Revenue Concerns - The analyst highlights that while Oracle reports large order wins and revenues, the actual value derived from these deals is relatively low due to a fundamentally different business model compared to traditional cloud services [3]. - Oracle's current deals are characterized as single-tenant agreements with fixed costs, contrasting with the previous cloud model that allowed for operating leverage and higher margins [3]. Group 3: Financial Projections and Risks - The five-year guidance for Oracle is estimated to be around $60 billion, but the renewal cycle for these contracts raises questions about the sustainability of this revenue [4]. - OpenAI is projected to incur losses of about $115 billion over the next four years and is not expected to become profitable until 2030, which raises concerns about Oracle's financial commitments to the partnership [4]. - Analysts suggest that Oracle may need to borrow tens of billions to establish sufficient data centers to support the OpenAI deal [5]. Group 4: Market Performance and Valuation - Oracle's stock has increased by 70% year-to-date, but its price-to-earnings (P/E) ratio is approximately 80% higher than the sector median of 24.4, indicating potential overvaluation [5].