To The Moon

🌟🌟🌟Last  week Oracle $Oracle(ORCL)$  is grappling with an investment paradox that has sent its stock down from its peak to USD 198.76 even though it is still up 19% year todate.  

What happened to Oracle?

The Double Edged Sword of AI Ambition:

Oracle's vision to power the AI revolution has secured major cloud deals with players like OpenAI and xAI.  Yet this ambition comes at a significant cost, leading to 6 consecutive weeks of stock decline and raising serious red flags for both investors and analysts.

Massive Capital Outlay: In order to compete with giants like Amazon and Microsoft,   Oracle is investing heavily in data centers, primarily funded by significant borrowing.  This has pushed its net debt to around USD 100 billion.

Thin Margins:  Reports have suggested that the actual profitability of leasing high demand Nvidia chips is lower than expected.  This has led to concerns about whether the enormous capital expenditures will yield acceptable returns.

Valuation Skepticism : After a rapid run up earlier this year, the market is pricing in substantial execution risk and questioning how quickly its large contract backlog will turn into profitable cash flow.

The Alarming Surge in Oracle's Credit Risk

The most telling sign of investor anxiety is the doubling of Oracle's Credit Default Swap (CDS) spreads.

A CDS is essentially an insurance policy against a company defaulting on its debt.  The sharp rise in the spread signals that the market perceives Oracle as a riskier borrower today than it did a few months ago. 

Investors are using these CDCs to hedge against the possibility of an AI bubble collapse, viewing Oracle as having a particularly vulnerable financial structure compared to its better capitalised peers. This fear has dampened stock enthusiasm. 

The Core Debate: Buy the Dip or Flee the Debt?

Is Oracle a Buy after its recent selloff?

The Bull Case for Buy:  Oracle's current valuation may be attractive after the decline.  Its strategic position in the AI infrastructure supply chain and strong backlog suggest future massive growth potential for risk tolerant long term investors who believe that Oracle can execute its ambitious vision.

The Bear Case To Avoid :  For risk adverse investors, the significant debt load, low AI margins and execution risks are major concerns.  The soaring CDC spreads are a stark warning that credit analysts are worried about Oracle's ability to manage its leverage.

My Personal Perspective

As a small retail investor with limited capital, Oracle's increasing debt and profitability concerns may make it a Good Bye rather than a Good Buy.

The surge in its CDS spreads is a market signal that the journey ahead for Oracle is fraught with uncertainty.  Until Oracle can prove that its massive AI investments can translate into sustainable profitable returns, Oracle is a powerful reminder that not all growth stories are created equal and that prudent risk management is as crucial as chasing the next big trend. 

As Warren Buffett famously said "Rule No. 1 : Never lose money.  Rule No. 2: Never forget Rule No. 1".

This deceptively simple rule emphasizes the importance of capital preservation as the bedrock of successful long term investing.  It is a mindset that prioritises minimising the downside over chasing quick high risks gains. 

This is particularly relevant when considering situations like Oracle's risky AI gamble versus $Alphabet(GOOG)$  more diversified stability.

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