Oracle’s heavy investment in infrastructure and strategic partnerships to enhance its position in the AI market has been met with skepticism from investors due to the rich valuation of the stock. The competitive landscape and uncertainties surrounding revenue generation, integration challenges, and strong competition with advanced AI capabilities from rivals are causes for concern. The recent dip below a key support level at $135, now acting as resistance, indicates potential downside risks to the current stock price. The relative performance of Oracle compared to the S & P 500 suggests a higher likelihood of a downturn rather than a breakout.
In terms of financials, Oracle trades at a forward earnings multiple of 30, significantly higher than its historical median of 20. This premium valuation reflects optimism about the growth of its AI servers, but there are signs of moderation in the pace of new contract acquisitions. Oracle’s expected EPS growth rate of 14% pales in comparison to competitors like META (21%) and AMZN (37%). The recent cancellation of a major cloud computing deal with Elon Musk’s xAI raises doubts about Oracle’s ability to secure and retain high-profile contracts.
Options on Oracle are pricey, making it an attractive candidate for using a spread strategy. For investors anticipating weakness in Oracle’s stock, the recommendation is to consider buying the October $130/$120 Put Vertical for a $2.68 Debit. This involves purchasing the October 18 $130 Puts at $5.38 and selling the October 18 $120 Puts at $2.70. The potential profit on this trade is $732 per contract if Oracle is below $120 at expiration, with a maximum risk of $268 per contract if Oracle is above $130 at expiration.
It is important to note that the opinions expressed in this analysis are solely those of the author and do not necessarily reflect the views of CNBC, NBC Universal, or their affiliates. This information is provided for informational purposes only and should not be considered as financial, investment, tax, or legal advice. Individual circumstances should be taken into account before making any financial decisions, and seeking advice from a financial or investment advisor is strongly recommended.