Oracle got a sell call from an analyst Friday, who said a "gen AI hype cycle" had stretched the software company's valuation. But Oracle stock eked out a gain Friday, as the broader tech market rallied.
In a note titled "After a Year Filled with Hype, Froth, and Bold Capex Plans – Downgrading ORCL to Sell," Monness Crespi Hardt analyst Brian White lowered his outlook on Oracle stock from neutral to sell.
"In our view, Oracle represents a high-quality company with the opportunity to participate in a cloud transformation and benefit from the generative AI trend," White wrote. "However, valuation is stretched, competition fierce, software in transition, and the macro environment fragile."
Oracle had gained 60% year-to-date heading into Friday, which White noted would mark the software giant's best yearly performance since 1999.
But that has stretched Oracle's price-to-earnings multiple to double its historical average, he added. Despite that sign of investor confidence, Oracle delivered "surprisingly uninspiring results" when it report fiscal second quarter earnings on Dec. 9, White wrote. Shares fell more than 6% after both earnings and sales came in short of expectations.
On the stock market today, Oracle stock opened lower before recovering and closing at 169.76, up a half-percent.
Oracle Spends Big To Chase The Cloud's Big Three
White also questioned Oracle's plans to double capital expenditures to $14.2 billion for its May-ending fiscal 2025. The company is citing significant demand driven by AI for its Oracle Cloud Infrastructure business, which rents servers and other computing power.
But White noted that the company is up against tech giants Amazon, Microsoft and Google in that market.
"In our view, the public cloud landscape is daunting, a field dominated by three, large, innovative, deep-pocketed Big Tech companies with a powerful, ever-expanding gen AI arsenal, combined with a deep cloud portfolio," White wrote.
Oracle has had "early success" attracting gen AI clients to its cloud, White said
But, the note added, "the leading clouds are becoming more competitive in this area. Plus, we expect an inevitable shakeout in the LLM industry," referring to the large language models that are trained to vast data sets to power AI capabilities.
White gives Oracle a price target of 130, which he says provider a price-to-earnings multiple closer to the company's historical average.
Oracle Stock: December Slump
December has already seen investors at least press pause for the Oracle rally. Shares are down 8% this month, including Friday's early loss. That would mark Oracle's second worst month of 2024. Shares slumped 9.4% in April.
The stock hit an all-time high of 198.31 on Dec. 9, before earnings results later that day kicked off its recent slump. The earnings drop saw Oracle fall below two key support levels in its 21-day and 50-day moving averages.
Still, Oracle stock remains on pace for its best year since 1999. And on the flip side, Oracle stock was named a top 2025 software pick by analysts at Evercore ISI earlier this week.
Meanwhile, Oracle stock had an IBD Composite Rating of 89 out of 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. Further, the best growth stocks have a Composite Rating of 90 or better.
Oracle's IBD Relative Strength Rating was 87 out of 99. The RS Rating means that Oracle has outperformed 87% of all stocks by price gains over the past year.
