Oracle stock slides as analyst cuts to sell

Investing.com -- Oracle shares came under pressure premarket Friday, down around 1.3% after Monness, Crespi, Hardt downgraded the stock to Sell from Neutral and set a 12-month price target of $130, below its current price of $168.79. 

The firm cited concerns over valuation, heightened competition, and unsustainable capital expenditure (capex) plans.

Oracle’s stock has surged 60% year-to-date, fueled by the generative AI mania, marking its best performance since 1999, Monness analysts said. 

However, they cautioned that "valuation is stretched, competition fierce, software in transition, and the macro environment fragile."

The firm notes that Oracle’s recent second-quarter earnings call revealed challenges in maintaining growth. 

They added that its FY25 EPS estimate of $6.17 remains unchanged from last year, while its FY25 Cloud Services revenue projection of $24.9 billion is lower than the $25.4 billion estimated a year ago.

A major point of concern is said to be Oracle (NYSE:ORCL)'s “bold capex plans,” with the company aiming to double spending in FY25. 

"Our current FY:25 capex projection of $14.2 billion represents 24.6% of revenue, up from 13% in FY:24, and well above the 27-year average of 4%," the note stated. 

The analysts believe that this level of spending is unsustainable and has significantly impacted Oracle’s free cash flow margin, which they estimate at 8% for FY25—far below the historical average of 28%.

Additionally, Oracle’s balance sheet is said to be highly leveraged, with $88.6 billion in debt and a debt-to-capital ratio of 86%. 

The firm explains that this restricts the company’s ability to increase shareholder returns through dividends or buybacks and limits its capacity for acquisitions or broader organic investments.

While Oracle has enjoyed early success in generative AI, Monness cautioned that "an inevitable shakeout in the LLM industry" and intensifying competition from larger cloud providers pose risks.