Oracle stock (NYSE: ORCL) has pulled back nearly 6% from its recent 52-week highs following reports that the company is no longer in talks with Elon Musk's xAI startup for an expanded cloud-computing deal to train large language models. Despite this setback, Oracle has still outperformed the overall market and its sector, with the stock up over 30% year-to-date compared to the benchmark's 16.27% YTD performance.
The leading technology company known for developing software solutions for businesses worldwide, has greatly benefited from the AI boom. In its most recent earnings report on June 11, Oracle Chief Executive Safra Catz said the company is seeing "enormous demand for training AI large language models."
What Happened with the xAI Deal?
In May, several sources and media outlets reported that xAI and Oracle were discussing a multiyear deal worth up to $10 billion to provide xAI with cloud servers. Oracle's cloud infrastructure business had already supplied xAI with specialized chips from NVIDIA (NASDAQ: NVDA). However, the two sides ended talks to expand their arrangement, and xAI will now buy chips from NVIDIA to build its own data center, according to several reports.
Following the report, Musk wrote on X.com that xAI decided to build an internal system because "our fundamental competitiveness depends on being faster than any other AI company. This is the only way to catch up."
Analyst Insights on the xAI Deal Fallout
Some analysts are downplaying the impact of the canceled deal with xAI. Jefferies analyst Brent Thill reassured clients that Musk's change of plans will not affect Oracle's extensive cloud work backlog, which stood at $98 billion in remaining performance obligations as of the end of its fiscal fourth quarter in May. Thill highlighted that Oracle continues to experience robust demand despite the xAI shift, with its pipeline expanding faster than bookings and revenue.
Evercore ISI analyst Kirk Materne shared a similar view, asserting that Oracle's cloud business has ample growth potential even without Musk's additional spending. Materne pointed out that since the xAI deal was not factored into last quarter's RPO figures, there is no significant risk to the company's estimates from the agreement not proceeding. While supporting Gen AI workloads is a key part of Oracle's strategy, the immediate priority lies in securing more traditional workload contracts from larger enterprises and government entities.
Analysts' Views and Ratings
Despite the recent developments, analysts remain bullish on Oracle stock. ORCL is among the most upgraded names, with a consensus rating of moderate buy based on thirty analyst ratings. The consensus price target of $145.83 forecasts an almost 6% upside.
On July 12, Piper Sandler reiterated its overweight rating with a $150 price target. On June 25, analysts at Morgan Stanley and Guggenheim also took action. Guggenheim reiterated its buy rating with a street-high forecast of $175, projecting almost 27% upside. Morgan Stanley analysts reiterated their equal weight rating with a $125 price target. Overall, ORCL's moderate buy rating is in line with other Computer and Technology companies and the S&P 500 consensus rating.
Insider Selling Concerns
One worrying sign, however, is the consistent insider selling that has occurred. Over the past twelve months, insiders have sold $377.45 million of ORCL stock, although current insider ownership remains substantial at 42.8%. Most recently, on July 15, founder and chairman Lawrence Ellison sold just over 1.1 million shares at an average price of $143.69 for a total of $161.6 million. On July 10, insider Edward Screven sold over $60 million in stock.
The Bottom Line
Oracle has shown strong performance and significant demand in the AI sector, but the fallout from the xAI deal and insider selling might cause some investors to caution. Analysts, however, remain optimistic about the company's future, viewing the pullback as a potential opportunity rather than a setback. One thing for sure is that as Oracle grows its cloud infrastructure business, it remains a crucial player in the technology sector with substantial potential for further gains.
