The "culprit" that destroyed the AI bull market: the "weakest link" Oracle

The AI-driven bull market is facing a severe reality test.

Amid concerns over an AI bubble, the three major U.S. stock indices fell again on Tuesday, with the S&P 500 declining for four consecutive trading days. High-valuation tech stocks and chip stocks, represented by NVIDIA, are generally under pressure, dragging the Nasdaq Composite Index down by 1.2%.

(U.S. stock benchmark index intraday performance, small-cap stocks performed well)

A new survey of fund managers shows that 45% of respondents view the "AI bubble" as the primary "tail risk" for the market, with concerns about excessive corporate spending on AI-related projects rapidly spreading.

In this widespread anxiety, Oracle's situation is particularly prominent. Since announcing a landmark $300 billion agreement with OpenAI on September 10, the company's stock price has not only failed to rise but has also fallen, with its market value losing approximately $60 billion, equivalent to the market value of General Motors.

This shift marks an important market turning point. A few months ago, any collaboration with OpenAI could easily ignite stock prices, but now the "OpenAI halo" is rapidly dissipating.

Investors are no longer merely buying into the AI narrative; they are beginning to rigorously scrutinize the financial costs companies incur to support this narrative, especially those that fund expansion through heavy borrowing.

Oracle's Astonishing Capital Expenditures and Financial Risks

Oracle has outlined a grand growth blueprint, but the financial structure behind it appears unusually fragile.

Compared to its competitors, Oracle's operating profit available to support expansion is not abundant, making its bet on OpenAI seem more like an "all or nothing" gamble.

Specific financial data reveals the root of investor concerns. At the recent analyst day, Oracle stated that its goal is to achieve $166 billion in cloud computing revenue by 2030, with most of the growth expected to come from OpenAI starting in 2027.

To achieve this goal, its capital expenditure budget for the current fiscal year ending next May is as high as $35 billion. The market generally predicts that by 2029, its annual capital expenditures will stabilize at around $80 billion per year.

Meanwhile, analysts believe the company's balance sheet is under tremendous pressure:

• High Debt: Oracle's net debt has reached 2.5 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), more than doubling since 2021, and is expected to double again by 2030.
• Sustained Negative Cash Flow: The market predicts that the company's cash flow will remain negative for the next five years.
• Rising Risk Premium: The cost of hedging Oracle's debt default risk (Credit Default Swaps, CDS) has risen to a three-year high, directly reflecting the market's growing concerns about its credit risk

The Dissipation of the "OpenAI Halo"

The predicament of Oracle also reflects a broader market trend, as the "OpenAI halo" that once turned related companies' stock prices into gold is rapidly fading.

A few months ago, any news of collaboration with OpenAI could trigger a surge in stock prices, with AMD being a typical example; its stock price soared after announcing a chip agreement with OpenAI.

However, the situation has now reversed. Both Broadcom and Amazon saw their stock prices decline after announcing collaborations with OpenAI. Meanwhile, Nvidia's stock price barely changed after reaching an investment agreement in September.

When partnerships with AI leaders no longer boost stock prices, these commitments to capital expenditures in the hundreds of billions of dollars begin to lose their appeal.

For investors, if even the market starts to question the value of these investments, how long can the massive capital inflows supporting the AI bull market continue?

The unpredictable shifts in investment sentiment are becoming the sword of Damocles hanging over AI concept stocks