Oracle shares are down around 2.5% premarket on Thursday after Redburn initiated coverage of the stock with a Sell rating and a $175 target price, warning that the market “materially overestimates the value of Oracle’s contracted cloud revenues.”
The analysts argued that Oracle’s role in single-tenant, large-scale deployments is “closer to that of a financier than a cloud provider, with economics far removed from the model investors prize.”
According to Redburn, Oracle’s five-year Oracle Cloud Infrastructure (OCI) revenue guide equates to roughly $60 billion in value, meaning “the market is already pricing in a risky blue-sky scenario that is unlikely to materialise.”
Redburn said the market assumes supplying compute to OpenAI will follow the “Cloud-1.0 playbook, where economics improved over time through higher asset utilisation and software layering.”
Instead, the firm stressed that “Oracle’s economics are largely fixed and contracted, with the upside accruing to OpenAI. It is a spread business, and our analysis shows a thin one, further constrained by OpenAI’s operational involvement in Stargate, which limits Oracle’s ability to capture value.”
While some investors see an upsell opportunity in Generative AI applications, Redburn dismissed this as “more narrative than reality,” noting it requires both customer adoption of Oracle’s cloud and “substantial R&D investment to provide the necessary tools.”
Redburn also highlighted structural risks. “Renting out servers is far more capital-intensive,” the analysts said, warning that the market underestimates the scale of fixed-cost headwinds.
They added that Oracle’s “long-term lease commitments extend well beyond its OpenAI contract, creating a mismatch, while at scale OpenAI could pursue vertical integration.”
Source :
https://www.investing.com/news/stock-market-news/oracle-gets-a-new-sell-rating-on-wall-street-4255371
