Analysis-Oracle’s stumble hits AI trade, but many remain bullish

Audio By Carbonatix

Enlarge

By Saqib Iqbal Ahmed and Lewis Krauskopf

NEW YORK, Dec 12 (Reuters) – The red-hot trade backing artificial intelligence-related stocks has taken a bruising from a disappointing report from Oracle, reigniting concerns about frothy valuations and an AI bubble.

Still, investors say reasons for optimism about AI remain intact, and many are wary about calling a top.

Investors have piled into AI-related companies this year as the technology has taken off, with promises to make Corporate America more efficient.

Still, some investors feel AI-related shares are overvalued. High-profile names such as Michael Burry have been bearish, comparing the recent AI boom to the 1990s dot-com era. Still, short-selling has been limited to smaller companies, with few pressing bearish bets against the biggest AI names.

The latest concerns centered on Oracle. Its shares slumped as much as 16.5% on Thursday, a day after the company, which has taken on debt to finance its ambitious AI spending, warned capital expenditures for fiscal 2026 are now expected to be $15 billion higher than it estimated in September. After the bell, adding to negative sentiment, Broadcom cautioned that margins would fall due to a higher mix of AI revenue, sending shares lower in after-hours trading.

Oracle’s decline weighed on other tech shares during the day, as investors worried about AI spending and the lack of a clear timeline on returns from the investments. Still, the broader market remained steady and on Thursday, the S&P 500 inched up to finish at a record high. 

“I view this more as an Oracle issue as opposed to a problem in the AI trade overall,” said Chuck Carlson, chief executive at Horizon Investment Services in Hammond, Indiana.

“Oracle is a little bit unique in that they’re trying to become a hyperscaler, but they don’t have the cash flow, they don’t have the financial strength of the hyperscalers like the Alphabets and Microsofts and Amazons … I don’t think that’s going to be something that trashes the AI trade,” Carlson said.

Oracle declined to comment on its share price move or the AI trade.

MORE SCRUTINY

Investors have been growing more picky in the AI space, some market participants said, with less willingness to indiscriminately reward spending on AI.

“You’ve seen this really positive correlation between really aggressive capital spending and stock prices … That has changed pretty significantly beneath the surface over the last couple of months,” said Mark Hackett, chief market strategist at Nationwide.

In late November, Meta shares slumped 11% after the Facebook and Instagram parent forecast “notably larger” capital expenses next year due to AI investments, including aggressively building data centers.

Capital spending, a crucial component of the AI trade, has propelled equities following the launch of AI assistant ChatGPT in November 2022. 

“All this heavy spending on AI, it’s taking much longer than investors want to result in cloud revenue,” said Robert Gill, portfolio manager at Fairbank Investment Management.

SHORT STORY

Even investors who question the AI trade are wary of betting against it.

“I believe today the stock market is in a phase that could become a blow-off top of extreme magnitude on the upside,” Burry, the famed investor whose successful 2008 bets against the U.S. housing market were dramatized in the movie “The Big Short,” wrote in a post. Burry recently stepped up criticism of tech heavyweights including Nvidia and Palantir Technologies, questioning the cloud infrastructure boom. He has a short position on Palantir.

Two leading U.S fund managers, who requested anonymity, said worries about a bubble are exaggerated. They noted that Big Tech “hyperscalers” were still struggling to meet unrelenting demand for more data centers.

“Across our basket of 61 AI-related stocks, we don’t yet see positioning that looks like investors aggressively betting on an AI bubble bursting,” said Peter Hillerberg, cofounder at data and analytics company Ortex Technologies.

Investors have shown a pick-up in appetite to short the smaller and mid-cap AI names, yet the largest AI beneficiaries remain only lightly shorted, Ortex data showed.

“We have seen stock-specific spikes in short interest around earnings and headline risk in certain AI-linked names, including Oracle, and some of those trades will naturally look smarter after sharp post-results moves,” Hillerberg said.

“But taken together, the data look more like targeted skepticism in individual AI stories than a broad, coordinated attempt to call the top of an AI bubble.”

ROTATION

A silver lining for investors is how the broader market has prospered even as some big AI names have stumbled.

Fueled by a long period of strong performance, tech is by far the biggest sector in the S&P 500, accounting for a 35% weight in the benchmark index as of Wednesday’s close.

Investors worry about the impact on the market if enthusiasm falters for high-flying AI names that have helped the S&P 500 rise 17% year to date.

On Thursday, the benchmark stock index evaded serious damage despite the selloff of AI names, assuaging some concerns. 

“The big question, like I said, was can we see a transition in leadership without there being a significant dislocation in the overall index? So far so good,” Nationwide’s Hackett said.

(Reporting by Saqib Iqbal Ahmed and Lewis Krauskopf; Additional reporting by Anirban Sen in New York and Twesha Dikshit in Bengaluru; editing by Megan Davies and David Gregorio)