Oracle, the AI Boom's Weakest Link, Scraps $7.5 Billion Stock Sale

If there is any company that personifies the risks inherent in AI, it is Oracle. It has bet billions it doesn't have on data centers and related AI investments while its founder, CEO and chief investor Larry Ellison is massively overleveraged thanks to AI and to his son's desire to be a Hollywood mogul, which Ellison has supported financially. 

Oracle, and Ellison, can least afford the AI race and also has the most to lose soonest if the bubble goes bust. His decision not to sell $7.5 billion of his already underperforming stock is tied to this state of affairs and he is probably one of those urging his pal Trump to insist on no AI slowdown as that might push Oracle over the edge. JL

Spencer Jakab and Robert McMillan report in the Wall Street Journal:

The weakest of the (AI wannabes) financially is Oracle. Since it’s last quarterly update in June, S&P downgraded its debt to one notch above junk. The cost of insuring against its loans and bonds defaulting hit a multiyear high -four times as much as for Microsoft. The stock is now trailing the S&P 500 by 51 points over the past 12 months. Oracle shares are down 23% this year, while the Nasdaq is up more than 13%. Larry Ellison scrapped plans to sell $7.5 billion worth of his stake. He is one of the richest people on the planet, but he might also be one of the world’s most indebted and much of his wealth is tied to his Oracle stake. 24% of his approximately $200 billion net worth was pledged as collateral. He pledged $40 billion to support his son, Paramount CEO David Ellison’s hostile bid to acquire Warner Bros. in an $80 billion deal. Future profits needed to justify AI spending are immense, and Oracle has the smallest earnings cushion of AI firms relative to its debt.

The rush to dominate AI is starting to look like a trillion-dollar game of chicken.

Google co-founder Larry Page reportedly told employees that he’s “willing to go bankrupt rather than lose this race.” Amazon founder Jeff Bezos called AI an “industrial bubble” that’s seeing good and bad projects get funded, just like in the dot-com boom. And Meta’s Mark Zuckerberg recently committed to “building personal superintelligence for everyone.”

Every “hyperscaler” is playing to win, whatever that means. They’ll still survive if the fortunes they’re spending on data centers earn lousy returns.

But one to watch is Oracle, which is the weakest of the bunch financially and the most likely to blink first.

Since Oracle’s last quarterly update in June, S&P downgraded its debt to one notch above junk. The cost of insuring against its loans and bonds defaulting hit a multiyear high this summer. Though that has come down a bit, it remains about four times as much as for fellow hyperscaler Microsoft.

On its last earnings call, new Chief Financial Officer Hilary Maxson pledged “disciplined capital allocation, maintaining a strong balance sheet and preserving our investment grade credit rating.” Music to bond investors’ ears.

But her report of much more capital spending than expected, some $56 billion in Oracle’s fiscal year ended in May and $70 billion planned this year, was more like nails on a chalkboard. The stock plunged that day and has stayed weak, now trailing the S&P 500 by 51 percentage points over the past 12 months. Larry Ellison scrapped plans to sell up to $7.5 billion worth of his Oracle ORCL -4.55%

decrease; red down pointing triangle stake, a day after the company disclosed the billionaire’s trading plans.

In a statement Saturday, Oracle said Ellison had reversed course. “No Oracle stock was sold under that plan, and he has no other plans to sell any of his Oracle stock,” it said.

The Oracle co-founder has held on to his very large stake in Oracle since the 1970s. But in a Friday securities filing, Ellison revealed plans for one of his largest share-sales ever.

The Friday filing said that on June 22, Ellison adopted a plan to unload as many as 50 million Oracle shares, valued at about $7.5 billion at recent prices. The filing said he planned to be finished selling shares by Oct. 24.

Ellison is one of the richest people on the planet, but he might also be one of the world’s most indebted and much of his wealth is tied to his Oracle stake. A Wall Street Journal analysis found that about 24% of his approximately $200 billion net worth was pledged as collateral.

He has pledged more than $40 billion to support his son, Paramount Chief Executive David Ellison’s hostile bid to acquire Warner Bros. in a nearly $80 billion deal.

Oracle has plans to raise as much as $50 billion this year by selling stock and debt. It intends to use the funds to build data centers designed to process an expected boom in artificial-intelligence computing. Morgan Stanley credit analysts expect that it will need at least another $100 billion in 2027 and the first half of 2028.

Concerns over the company’s debt have helped weigh down its share price this year. Oracle shares are down more than 23% this year, while the tech-heavy Nasdaq is up more than 13%. 

In January 2001, Ellison sold nearly $900 million in Oracle stock, just over a month before the company’s shares dropped nearly 22% on lower-than-expected earnings. Ellison eventually agreed to pay $100 million to charity to settle an insider-trading lawsuit brought by shareholders over the matter.

Aggregate capital expenditures from it and the four other hyperscalers could be about $800 billion this year and are projected at more than $1 trillion annually for the next four years. The future profits needed to justify that spending are immense, and Oracle has the smallest earnings cushion of the bunch relative to its debt.

S&P pointed out in its downgrade that it’s concerned more broadly about the AI binge. “Near-term demand is strong, but this could reverse if leading frontier model developers are unable to raise external financing or stop subsidizing their customers.”

The stock market isn’t convinced that will happen, but more hard-nosed bond investors could spoil the party.