Oracle’s credit signals may overstate its financing risk

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 21:16

   international incorporated let's go to oracle because oracle seems to me is almost like the poster child for the debate so give us your thinking on oracle i what are you hearing from people on both sides as you talk to investors so first off like look oracle is not a hyperscaler so the reality is like microsoft amazon google like they are hyper they build data centers oracle doesn't build data centers so the reality is like when you think about open ai coming to them the 300 billion and they basically have about 500 billion that of revenue combined 300 that being open ai then now they have to fulfill over the next two three years by building by building so when you look at where oracle plays my view is like okay are they taking on debt is their quote unquote like is that out of the realm free cash flow going down is that typical oracle

2. 22:01

   Well, of course it's not. But the reality is that Ellison, the whole team at Oracle understands they have the opportunity. It's there. They see the numbers that if they take on some debt, build these data centers, I'm not going to say you're not going to have like headlines and, you know, and, you know, we could talk about thinly traded CDS and everything like that. But my view is, is that this has gotten way overdone.

3. 22:28

   I mean, I'll compare it to like Google earlier this year. I could compare it to like other times at Meta going back to 2022, times where everyone's like questioned the business model. The reality is that Oracle is going to play a huge role in this data center. And I actually think on large cap, if there's a table pounder name where we sit here today going to next year, it's Oracle. I mean, that's sort of – Before you jump in.

4. 22:54

   So when you're talking to investors who are negative on Oracle, what are they saying to you? They're like, you're telling me OpenAI is good for their bills? That's revenue that they're going to be able to fulfill? OpenAI is doing whatever, X amount of revenue, and they have a trillion dollars of opportunity that they're trying to go after. And my whole point is it's year three of an eight, ten-year build-out.

5. 23:19

   And the reality is OpenAI is building out essentially a new economy from a consumer and enterprise perspective. And I just view it as the fact that that's viewed as bad today in terms of being associated with OpenAI, I couldn't disagree more. And I think that continues to be the trade, right? Like anyone that's associated those stocks ever since the Altman sort of podcast interview with Brad and others has gone down.

6. 23:47

   You know, it's – I say it kind of somewhat jokingly, but it's true. I've gotten more questions on Oracle CDS in the last two or three weeks than I did on Citigroup CDS in 08. So not all our viewers – so let me give a little explanation. Yes, please. So CDS is credit default swaps, and it's a measure of risk. So if you wanted to basically short Oracle debt, what you could do instead is buy credit default swaps.

7. 24:16

   And so what would happen is spreads would blow out, and right now Oracle debt is trading like junk. And so people look at that and they say, well, it's not just the equity markets that think something's wrong with Oracle. It's the debt markets, and we all know the debt markets are much more intelligent than the equity market. That's a typical argument. And what people don't understand is that the credit default swap market is not what it was.

8. 24:41

   great financial crisis. It's much more illiquid. So if somebody wants to go out and short Oracle debt or buy credit default swap, that stuff moves on very, very, very little. So the fact that that Oracle's credit default swaps have blown out, it ain't great. Trust me, you know, for Oracle, if they want to raise some debt. But it's not necessarily really indicative of what the fixed income markets really seriously think about. It's also a reminder, I think the Oracle example here in particular is hold your narratives very, very lightly. I mean, think about, what was it, January, February, kind of into the April lows. NVIDIA at one point was an $86 stock, right, in that correction. Was it really? Yeah, it got down to about $86, $88. I think that was right about the low because our view going into the year was, hey, semis go down 50% every three

9. 25:29

   years and all NVIDIA's friends had already gone down 50 last summer, summer of 24. I thought NVIDIA would be next i didn't think it would happen in six days as it did in april of 25 but you know you kind of got to the mid 80s on NVIDIA i think the low is 88 and the high previous high was 160 that's that's kind of close enough so we're kind of in that ballpark of oracle here what's it down 40 ish from the highs a little more so you're kind of in the zone where again you might want to think about okay but by the way it's actually shocking when you think about how in such a shorter period of time from the moment that they announced their backlog when they reported third quarter to today it's only two or three months a lifetime ago you would think it's a different world but also one of the narratives

10. 26:20

    that's also important for viewers is like 75 to 80% of spending that's going to happen in tech over the next 12 to 18 months is being driven by That's funded by free cash flow from – they're not taking on debt for AI spent. So I think there's a perception like companies taking on debt and debt to fund this. That's actually wrong just mathematically in terms of what's being funded just from true cash flow from big tech.

11. 26:47

    Can I propose a theory? I'm curious your view on this. I've been thinking about this. I think one of the things people got wrong in late 22 going into 23 was when bond yields started to go up. kind of the view was, oh, tech's in trouble in that environment. But I think they missed the idea that these were self-funders, right? So higher rates penalized other parts of the market much more. Now, well, here we are now.

12. 27:11

    three years later, and they're not self-funders anymore, or they're not to the same extent they were self-funders. So is the risk here actually higher long-term interest rates over the next year or so because of the debt load that these companies are now taking on? I think, but it's still outside of Oracle, the debt load's been- Diminimous. Diminimous, yes. I think Google took on, has taken on, maybe 15 billion more in long-term debt.

13. 27:37

    Yeah, and when you look at that, a percentage of market cap is meaningless. Yeah, and even on the – now, you can make an argument, like, as Fed cuts, depending on whoever gets in Fed chair, that, like, mid-cap names, do they start to do more converts, converts, like – so you can make an argument that that could happen. But in terms of large-cap, it goes – it's still so small. Well, like, let's not forget on the rate side, you go back to 99-2000.