ORCL $638B RPO Faces AI Spending Surge & MSFT, GOOGL, AMZN Competition

Let's go deep now on a big name and that is Oracle and preview today's earnings report in our tech spotlight. John Blank, chief equity strategist and economist. Zach's investment research is with us and I think about Oracle and I remember a year ago where they had one report where the stock was up 30% and wow that was a lot of fun. But um look we've saw a selloff uh we see sell-offs and rallies when it comes to this. You know there were two selloffs in the last few. So, what do you think um is happening here? The options market is actually betting a lot on volatility. >> I think so, Nicole. We got to remember that, you know, this is a 1.7 beta stock and we got a five, you know, almost a 5% tenure, likely going to get a 5% tenure in the next week or two. So, that's going to kill the high beta names no matter how well the the fundamentals show up for for Oracle today. So, that's the that's the story for Oracle. The other thing you have to think about is this is a balance sheet trade as much as an earning statement trade. So they can beat the 174 today that we have in our system for consensus on the quarterly earnings. But uh you know they're basically just above investment grade as a as a bond credit. And uh this is another one of those issues when you know rates are rising. You got to throw a credit spread on top of the rate you know for the real price that Oracle is going to pay for their financing for all this growth. And that uh you know that's the bare case. So 150 from the 300 highs is the is the bulc case that this is a stock that's been beaten down, you know, 50% in the last year you're or so and you can get it to come up. But uh these are the two two camps and uh frankly you know with the tenure where it is uh Nicole I'm I'm with what's the day traders are doing today which is selling selling oracle not buying it. >> I see. Okay. I mean I know they have the implied volatility of about 11% but they expect volatility going forward with actually I saw selling calls in the 150 strike now um October, November, December. So a little more bearish than neut than than neutral but you know it's mixed. I mean and I know it's on very heavy volume at least two times what would be on a normal day. Now we've seen this transformation right going from a software company legacy software company into a cloud giant. How are they doing on that end? >> Well, look, you know, they're they're a $400 billion market cap company and they're going to do 68 billion in revenue this year. Uh, you know, they're trying to get to 130 130 billion or or more in revenue by 2028 of which, you know, this is the cloud growth that they're going to supply to basically half of it is or, you know, open AI. So this is the, you know, the story the market's going to be told about the the Open AI in front of their IPO and and they're trying to put the investment in place to serve that growth that that CE GPT and the other AI groups are going to deliver. So you know, you got to either believe that story and you can get, you know, a double growth in revenues, not earnings in the next two years, or you think that's just way too optimistic. And when the stock's been selling off, Nicole, and the calls are pretty, you know, below the the strikes, you know, are below the actual market price now, you know, the market's still betting that, you know, they're not going to deliver that growth. And it's and it's it's more optimism than they they want to swallow. >> And we also have to remember that cloud infrastructure profits are often less than software products. That's another element. But as it transforms into the AI world and has the open AI partnership and sometimes sentiment varies on open AI does that affect how people view Oracle? >> Absolutely. You know the one thing that's the bullcase for or you know this whole open AI you know connection is they have upgraded their their AI agent towards the cloud level which was their their big you know beef out there in the marketplace is cloud was inanthropic were that were the marquee enterprise area for the business. So it didn't look like they had the wrong partner up until a few weeks ago when they announced an upgrade to their AI capabilities to the cloud level. So that that is what Oracle wants to be. They want to be the enterprise AI choice of the marketplace. Problem they have here is they've got, you know, we've got Azure, you've got Google Cloud, you've got the Amazon Web Services, and these groups are multi-trillion dollar groups. And and cloud is a scale business. And and if the question you have to ask yourself is in an oligopoly situation where you're not the big player and people can undercut your price if if the margin erosion and the loss of business to these cloud you know enterprise groups that are basically the hyperscalers is going to take Oracle down. That's that's the other bare case. >> So I think about the backlog and that's something a giant backlog right that's part of the story as well. >> Absolutely. I mean, we we've got a backlog, you know, again, if you want to believe it, $638 billion in revenue. So, that's what they say they can get to. Uh, over how many years and who's going to deliver it? Of course, half this is going to be open AI. So, you know, again, it's all about you believing in downstream, you [clears throat] know, closed source AI in the United States being able to turn a profit and and astronomically grow its business in face of all their competition. So again, these are stories that if you just sit down from an industry, you know, perspective on competition, margins, growth. It's tough to get this bullish on any stock. And then that's the problem here is the stock is trading on the actual fundamentals that that it thinks the market thinks they're going to deliver, Nicole. And that that's just telling you that it's not that rich. And and if if the market's not that that strong, we've got a 150 share price, 160 share price. That that's rolling back 18 months of share prices. So the real question here, Nicole, is is the Oracle share price chart going to look like a lot of AI stocks in another year, and it's just foreshadowing this big spiky, you know, uh play which is over and going to come down for a lot of stocks, not just Oracle. So the big thing tomorrow will be what other stocks trade with the news out of Oracle. That would be the other thing I'm really interested in. >> Yeah. And you'll have to factor in the CPI print >> that could also move market sentiment, right? That I mean even if you have a blowout number or something great, if the CPI is very strong and shows a lot of inflation, something like that could also pressure the markets and take some of those names a little bit lower along with it. So, we'll have an extra element tomorrow. I also think about how you were writing about the outlook and there should be worry about the 2027 earnings per share growth. You even had a list of why you might want to sell this company. Um, just your outlook for 2027 and where Oracle could be positioned. >> Yeah, so I mean look, you know, 30% growth in revenue is is the call or even 40% but the the turndown is in the margins. The margins and the earnings are not that strong. Um, and this is the story here is that they're going to give back and financing uh and a lot of the upfront costs of putting this this infrastructure, this data center infrastructure in place and take out the earnings for for this company. So, you got growth rates are definitely there. Uh, you know, they they produce I I expect they will produce strong earnings. Their core business away from this by the way, Nicole, is really good. And, uh, you know, they they're making 32 billion in cash and uh, that's a strong number. So that's the other thing here is you know people are always thinking about what they've added to this business but the core business the Oracle database business uh is actually doing quite well and they are showing that they can compete in this marketplace. >> John great to speak with you and thank you for this preview. I know it's coming out later today. Everybody's waiting. John Blank Z investment research. Thank you John.