Oracle Corporation (ORCL.US) deals a blow to AI faith overnight! The US stock market's "Christmas market" adds another variable

After the Federal Reserve announced interest rate cuts and Powell's optimistic remarks, the market's "AI frenzy" and bullish cross-asset party only lasted for a few hours before coming to a sudden halt, as Oracle Corporation's stock price plummeted once again raising concerns about the overvaluation of popular AI tech stocks including Oracle Corporation, NVIDIA Corporation, Broadcomm Inc. Now, investors have to consider whether they will still see a new rally after the Christmas holiday at the end of the month. The MSCI All Country World Index was just a hair's breadth away from its historical peak before turning downwards, and gold also ended its three-day streak of strong gains. The strong gains in popular AI tech stocks before Oracle Corporation's stock price dropped, as well as in gold, copper, aluminum, and other cross-asset strong gains, were positive responses to the Federal Reserve's latest interest rate cut and Fed Chairman Jerome Powell's optimistic assessment of the U.S. economy and inflation. After Oracle Corporation announced lower-than-expected sales, significant cash flow reduction to negative $10 billion, a dependence on long-term losses for performance growth, and strong competition pressures faced by OpenAI, as well as a significant increase in capital spending by Oracle Corporation, concerns about the expensive valuations of popular AI tech stocks reignited, leading to a decrease in the optimistic sentiment. This caused Oracle Corporation's stock price to plummet more than 10% in after-hours trading, while Nasdaq futures fell by as much as 1.6%. Wall Street is becoming increasingly cautious about investing in Oracle Corporation The negative financial data from Oracle Corporation instantly sparked discussions on Wall Street. Despite the non-GAAP earnings per share significantly surpassing expectations and a record-high backlog of $52.3 billion in cloud computing orders, the true profits were artificially inflated by a one-time gain of $2.7 billion, and the core business's profit margins and cash flow were under pressure. The growth in Oracle Corporation's cloud computing orders cannot mask the anxiety about actual profit conversion, and the slower-than-expected growth in cloud business and a surge in capital spending leading to negative free cash flow, all these negative factors caused Oracle Corporation's stock price to plummet by 10% after the financial report. UBS Group AG, Bank of America Corp swiftly lowered Oracle Corporation's target price after the financial report was released, and Morgan Stanley placed Oracle Corporation's stock rating under "careful review", highlighting the shift in focus in the market to profit quality (especially concerning the significant dependence on OpenAI leading to concerns) and the actual realization of the backlog of orders. Morgan Stanley's analyst team stated that Wall Street's focus on Oracle Corporation has shifted from "order growth" to "actual order conversion efficiency" and "overall profit margins". They pointed out that despite the continuous expansion of cloud computing orders, investors are losing confidence in their conversion into "sustainable profits and profit margin expansions". The financial data showed that Oracle Corporation's total revenue grew by 13% year-on-year last quarter, unexpectedly lower than market expectations; the cloud infrastructure (OCI) business revenue was $4.079 billion, a 66% year-on-year increase, lower than the market's widely expected 68%; software business revenue unexpectedly dropped by 3% year-on-year, becoming a significant weak point dragging down overall growth. Morgan Stanley also warned that the global restructuring of Oracle Corporation's sales team could pose execution risks, and flexible contract modes such as "Bring Your Own Chip" (BYOC), while reducing the capital expenditure pressure on Oracle Corporation's AI infrastructure system sales channel centered around GPUs, could weaken the overall profit potential, further exacerbating uncertainties in profit conversion and profit margins. Morgan Stanley emphasized that the market needs clearer signals: only if core indicators show substantial improvement, with revenue growth accelerating far beyond expectations like NVIDIA Corporation's, stabilizing gross margins, or positive free cash flow, and the dominance of customer revenue not limited to OpenAI, can the market regain confidence in the sustainable profitability of Oracle Corporation's cloud AI computing business. Investor sentiment can change quickly, and the possibility of the "Christmas rally" missing is on the rise. The rapid reversal of sentiment towards Oracle Corporation itself and cross-asset investment sentiment highlights that despite the temporary boost in overall investor risk appetite in recent weeks due to expectations of further Fed easing, persistent concerns about the artificial intelligence bubble are heavily suppressing investor sentiment. After the negative financial data from Oracle Corporation was released, the market's new round of doubts about artificial intelligence, coupled with Powell's recent indication that the Fed's three consecutive interest rate cuts have taken sufficient measures to help stabilize the labor market, are jointly amplifying uncertainties in cross-asset markets in the final weeks of the year. "The market's expectations for the future are uncertain - the direction could go either way, making it difficult to have a very clear judgment on trends," said Nick Ferres, Chief Investment Officer at Singapore's Vantage Point Asset Management. Ferres emphasized that Vantage Point's main fund is seeking to increase investments in short-term bonds, and expand existing allocations in Asian tech stocks and so-called "fundamentally strong" stocks with long-term profit growth. After the Federal Reserve's monetary policy decision, the most sensitive two-year U.S. bond yields fell by nearly 8 basis points, marking the largest single-day decline in two months, indicating a significant rise in prices for two-year and shorter-term U.S. bonds - benefiting from the significant reduction in the federal funds rate by the Federal Reserve for three consecutive times. During the Asian session on Thursday, this yield continued to decline further. The events triggered by the intense drop in Oracle Corporation's stock price, as part of the concerns about the burst of the artificial intelligence bubble, also included massive sell-offs of shares in the Japanese investment giant Softbank Group. The stock price of this Japanese conglomerate fell by 8.4% at one point, marking the largest single-day decline since plunging over 10% on November 25. The spreading of concerns stemming from Oracle Corporation's financial report to blue-chip stocks in Japan like Softbank is because Softbank and the U.S. cloud computing leader Oracle Corporation share exactly the same characteristics: both have extremely close long-term partnership relationships with OpenAI. These three companies are core participants in the "Stargate" AI superstructure project. In addition, Softbank has poured massive funds into OpenAI, but the escalating battle of large models between OpenAI and Alphabet Inc. Class C, where OpenAI is clearly in a disadvantage, is of concern. Softbank's Chief Financial Officer, Yoshimitsu Goto, even recently stated that Softbank remains firmly focused on OpenAI and has no intention to provide funds to its competitors. This means the fate of these three companies is highly intertwined. The globally leading AI application company OpenAI, with a valuation of up to $500 billion, has reached agreements on AI computing resource supply with several tech giants over the past few months, with the scale expanding to hundreds of billions of dollars, approaching the massive expenditure plan of $1.4 trillion as envisioned by OpenAI's CEO Sam Man for AI computing infrastructure. This exaggerated series of orders, as well as Gemini3 of Alphabet Inc. Class C starting to erode the ChatGPT user base, have heightened concerns in the market about OpenAI's ability to bear such enormous expenditure, and if OpenAI faces a funding crisis, it undoubtedly will cause a severe blow to the stock prices of the companies in the "OpenAI chain" led by Oracle Corporation. Therefore, the current sentiment in the market towards investments in AI computing industry chains related to OpenAI has shifted from a steadfast bullish stance to skepticism (in contrast, after the advent of Gemini3 and its rapid popularity, the sentiment towards the "Alphabet Inc. Class C AI chain" has quickly turned hot), and as uncertainty about the future contracts to be fulfilled by Oracle Corporation's OpenAI increases, the triangle structure of valuation-debt-cash flow of Oracle Corporation appears fragile. However, some market observers still maintain an optimistic stance on the future trends of Oracle Corporation and the stock market as a whole. "I don't think this is a 'canary in the coal mine'," said Kenny Polcari, Chief Market Strategist at Slatestone Wealth, in an interview with the media following Oracle Corporation's performance announcement. Polcari emphasized that considering the significant rise in global tech stocks this year, we are "not surprised by the drastic stock price reaction."