Oracle has found itself in the line of fire as investors sound the alarm over its massive borrowing -- and as broader concerns about artificial-intelligence spending rock the market.
Shares are down 35% from a recent high of $313 in October, and down 38% from a record close of $328.33 on Sept. 10.
At least the AI infrastructure provider has Wells Fargo in its corner. In a research note Wednesday, analyst Michael Turrin initiated coverage on Oracle at Overweight with a $280 price target.
Turrin's price target suggests the stock could rise 37% from Wednesday's levels, as Oracle traded 1.3% higher to $203.73.
Oracle shares gained 2.5% in overnight trading after rising 3% on Thursday trading.
Oracle is undoubtedly under pressure, but Turrin says the cloud computing giant is set to emerge as a "clear market share gainer in infrastructure." He expects Oracle's Cloud Infrastructure segment to capture roughly 16% of market share by 2029, up from 5% this year.
The company has booked nearly half a trillion in AI deals already, Turrin said. Oracle's relationships with OpenAI, Meta Platforms, and TikTok, to name just a few of the customers who rely on its infrastructure, put Oracle in "pole position."
OpenAI is a major part of that. In September, Oracle secured a $300 billion, five-year contract with the ChatGPT maker. Turrin sees further upside from existing $75 billion commitments "from various AI labs" as well as OpenAI's long-term ambitions under the Stargate project, a joint venture between Oracle, OpenAI, and other partners.
The ChatGPT maker stands at 8 gigawatts of its Stargate capacity, just a sliver of the 250 gigawatts it's targeting by 2033, Turrin pointed out.
While Oracle shares sit more than 40% off their highs, Turrin asserts that the company's valuation is reasonable given the "magnitude" of the AI opportunity ahead. He suggests concerns over AI spending that have gripped the market lately are transient.
Turrin expects the company to close the gap to its formidable opponents Amazon.com and Microsoft as it proves its ability to handle AI infrastructure across a variety of hardware types.
If his thesis pans out, Oracle may grow into a competitive force to be reckoned with, but this doesn't cancel out the fact that Oracle is on far shakier ground than its competitors. While both Amazon and Microsoft have committed billions to AI spending, the tech giants are capable of funding their capital expenditures through substantial free cash flow.
Concerns about Oracle's credit risk erupted in October as investors questioned how the company would finance its capex needs without sufficient cash flow generation to cover them. The company issued $18 billion of bonds in September, adding to its existing debt of $105 billion.
The creditworthiness of the company's unsecured debt was high-A-rated less than five years ago, before Oracle diverted a significant portion of its cash flow to shareholders, resulting in multiple-notch downgrades.
Oracle's debt is currently rated BBB, the lower end of investment grade, with a negative outlook, at S&P Global. Microsoft and Amazon are rated AAA and AA, respectively -- the higher end of investment grade.
Turrin's vote of confidence comes even after the cost of protecting Oracle's debt against default reached the highest level since March 2009 on Tuesday. Five-year credit default swaps climbed to 1.3 percentage point a year, or 130 base points, marking their highest level in over 16 years. The figure has tripled from as low as 0.36 percentage point in June.