For those of you who would prefer to listen:
A fairly unusual thing occurred this week. A large Tech company reported a double-miss, yet the stock soared to levels previously unseen. Of course these days, nothing seems to surprise. Things are happening that have never happened before. AI has created Bull Market mania.
Oracle fell short of expectations with its latest revenue and earnings Tuesday. That didn’t matter to Wall Street. It was quickly discarded when the company revealed some massive numbers ahead.
Oracle signed 4 multi-Billion-Dollar contracts in the quarter, resulting in $455 Billion in what’s called Remaining Performance Obligations (RPO). Said differently, its revenue under contract that has yet to be recognized. The visibility for expansive growth in Oracle’s Cloud Infrastructure revenue shocked all. Oracle is now expecting $18 Billion in the current fiscal year. That translates to 77% growth. In the next four years, the company said that revenue will rise to $32 Billion, $73 Billion, $114 Billion and $144 Billion, respectively. These are huge numbers that were not anticipated.
This unexpected news from Oracle re-ignited the AI rally. Its stock surged nearly 40% in a day, marking Oracle’s best performance since the 1990s. Keep in mind, the company was much smaller then. 3 decades ago, long before the Mag 7, there were the 4 Horsemen of the Stock Market. They were Microsoft, Intel, Cisco and Oracle.
Oracle’s historic move marked the first time that an American company with a $500+ Billion valuation saw its stock gain over 25% in a single trading day. No company this big has ever seen its stock have a day like Oracle did Wednesday. Nvidia experienced a 24% daily gain in 2023. The AI trade is again partying like it’s 1999. The Stock Market is all Bulled up.
That $455 Billion RPO number from Oracle includes contributions from the Stargate AI infrastructure joint venture. If you recall, that’s the government orchestrated group which includes OpenAI and SoftBank. OpenAI, the owner of ChatGPT, signed a contract with Oracle to purchase $300 Billion in computing power over the next 5 years.
Oracle will need to invest in its infrastructure to keep up with the demand. The company’s capital expenditures for the fiscal year are expected to be $35 Billion. That’s a whopping 40% increase. Most of Oracle’s investments have been for revenue-generating equipment in data centers, not the land or buildings.
The growth will come at a price. Oracle’s free cash flow has now gone negative and should be for a while to fund the growth. It will likely have to borrow to provide the increased spending. The increased revenues are not falling to the bottom line. The Market is clearly not concerned about that; At least not yet.
The total economic opportunity for AI is massive. Some are predicting $3-4 Trillion by the end of the decade. Semiconductor stocks, led by Broadcom, Nvidia, and Taiwan Semi rallied as Oracle’s report signals a sustainably strong demand for AI infrastructure. Interestingly, Nvidia had not seen a 2%+ gain in over a month. Nuclear and other power generating company stocks jumped too as Oracle’s data center investments highlight demand for its power generation.
ORCL wasn’t a Top 10 weight in the S&P 500 to start the week and not even a member of the Tech-heavy NAS. It’s in the top 10 now. Something interesting and a little telling; The percentage of shares that are short the stock jumped by 10% ahead of the earnings report. An increased number of speculators were betting against Oracle’s stock. They sure got that one wrong.
The stock spiking on the surprising news led to a massive short-covering frenzy. The short position was not that big though, all things considered, showing that there was real buying power at play. Trading volume in Oracle stock was up 10-fold on Wednesday. It was a once in a generation type day.
Did Oracle draw a line in the sand between the haves and have-nots? Founder Larry Ellison leaped ahead of Elon Musk as the richest man in America. The following day, a group led by his son made a bid to acquire Warner Brothers Discovery. Since Silicon Valley disrupted Hollywood, the Tech Titans have been dominating content and distribution. Smaller companies are struggling to compete. That theme just took it up a notch.
Leadership has narrowed again. The Dow and R2K actually closed down on Wednesday. That means Blue Chips and Small Caps did not participate in the rally at all. The NAS erased most of its gains and though the S&P led the major indexes, 60% of its constituencies were red. That trade reversed and broadened big time Thursday, with all 3 major averages hitting fresh, all-time highs. There’s a lot of activity below the surface and a lot of good already priced into the Stock Market.
There was a flurry of Bullish AI commentary out of the Goldman Sachs Communacopia conference in San Francisco this week. Google’s Cloud Chief said the company is already monetizing its AI investments. “Our backlog is now at $106 Billion — it is growing faster than our revenue.” He said that over 50% of its orders will convert to revenue over the next 2 years. The Market loves seeing returns on these massive investments.
Tech leaders reiterated it’s still very early days for this AI development. The companies expect the AI momentum to drive significant changes in network building over the next decade. That money keeps getting plowed into Tech. The scorecards are clear; Big Tech is responsible for the vast majority of the earnings growth. That’s been the clear driver of this Bull Market rally. Is it ahead of itself? Probably. Is this an AI bubble? Perhaps. Something that I learned early on in this business: The Market stays overbought far longer than oversold. We’re ready for whatever comes our way.
I’m going to veer a bit outside my traditional lane, if you permit me. A big risk in the proliferation of Artificial Intelligence is our humanity. Is it going to make us smarter? Is it going to make us better? Many say yes. But it could very well make us worse. Algorithms cannot replace blood, sweat and tears.
At this stage, there are far more questions than answers. It’s not just an American issue either. It’s a global issue. People are addicted to their devices. It’s not always good what comes out of it. Artificial realities spawn. As a dad, husband and business professional, I worry about it. I worry about it a lot. We want to get in front of it and stay in front of it. That’s no easy task.
Lastly, as I leave you this weekend getting off another airplane on the 24th anniversary of the day that changed everything, I am reminded how great this nation is but how sorely divided we the people have become. The divide seems to widen by the day. Our system is beyond stressed. These 2020s are not our finest moment.
The response from our fellow Americans and the rest of the world in 2001, on September 11th, was unifying. It was inspiring. It was real. Our union is far less connected today. We lost 2,977 of our brothers and sisters that day; two of which I called friends. One was in the World Trade Center. The other was on flight 93. I will never forget Brent and Mark.
Time is the ultimate healer. Today, two and a half decades later, the pain has numbed if not gone away, for many. The fact is, a generation of Americans weren’t even born and have no real relationship or understanding of what happened that tragic day. Storytelling is not just a tool, it’s a responsibility for future learning. It’s the foundation of real intelligence, as the artificial variety is taking over. It’s so critical that we all remember that we the people have far more in common than not. That’s something. That’s everything.
Thanks for reading/listening.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
