Oracle's AI Hangover Highlights the Risk of Chasing Late Cycle Tech Winners

"I recalled how strong Oracle looked earlier this year. The stock surged, Larry Ellison briefly became the second-wealthiest person in the world, and Oracle stood front and center during high-profile AI announcements. For a moment, it felt like Oracle had reclaimed its place among the most powerful names in technology. That confidence evaporated quickly. Oracle's fiscal third quarter turned out to be its weakest since 2021, and the stock was hit hard. Nearly all of the gains driven by spring and summer optimism were wiped out."

"Lee pointed out that a major difference between Oracle and some of its peers is how AI spending shows up on the balance sheet. Oracle has taken on significant AI and data center exposure directly, rather than pushing much of that risk off balance sheet through third-party financing. I added that this matters if AI investment slows or returns disappoint. In that scenario, Oracle would feel pressure not just in earnings, but also through asset write-downs and leverage concerns."

"We then asked a broader question: if AI is guaranteed to be transformative, why are some of the biggest tech companies hesitant to carry all the infrastructure risk themselves? While companies like Microsoft and Amazon already have massive cloud investments, they are not rushing to absorb unlimited additional data center exposure. That disconnect makes investors uneasy. When companies promote AI aggressively but hesitate to fully fund it internally, markets start to question long-term returns."

Oracle surged earlier in the year as its stock rallied, Larry Ellison briefly became the second-wealthiest person, and Oracle featured prominently in high-profile AI announcements. Confidence evaporated after a weak fiscal third quarter, the company's poorest performance since 2021, which erased most spring and summer gains. Oracle assumed significant AI and data-center exposure on its balance sheet rather than shifting risk through third-party financing. Slower AI investment or disappointing returns would create pressure via earnings, asset write-downs, and leverage concerns. Large cloud peers have been cautious about absorbing unlimited infrastructure risk, creating investor unease and misaligned expectations.

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