Here's Why Oracle Stock Slumped Today
Key Points
Apple's lawsuit against OpenAI may impact Oracle due to their partnership.
S&P Global sees Oracle's business risk rising, especially if OpenAI faces setbacks.
Oracle (NYSE: ORCL) stock declined more than 6% today as the company was hit with more bad news following last week's credit rating downgrade by S&P Global Ratings to BBB- from BBB. The latest news, Apple suing OpenAI, indirectly relates to some of the factors touched on in the downgrade, and that's what investors are concerned about today.
Apple sues OpenAI
The consumer electronics giant filed a lawsuit against OpenAI, alleging that it stole trade secrets from Apple and seeking to block the AI company from using them. It's the latest controversy for the company: , after Elon Musk filed a high-profile lawsuit against OpenAI and its CEO, Sam Altman. While Musk lost the case, it was only on the basis that he hadn't made the legal accusations within the time frame of the statute of limitations.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
While it's far from clear where the Apple case will go, it raises questions about OpenAI, which might not be good news for its partner, Oracle. It's noticeable that Oracle's credit default swap (CDS) pricing (the cost of insuring against default) started rising after the company signed a $300 billion deal last year with OpenAI, in which Oracle will build out AI infrastructure to sell compute to the AI company.
Image source: Getty Images.
S&P Global downgrades Oracle's debt
Not only are investors questioning OpenAI's pathway to profitability and, in turn, its ability to meet its contractual obligations, but the cost of Oracle's AI infrastructure build-out is also raising concerns. The credit rating agency estimates that OpenAI makes up half of Oracle's remaining performance obligation and notes that "If OpenAI were unable to pay Oracle, we believe Oracle could be left with massive data center leases that it might be unable to exit or have to release to new tenants under less-favorable terms."
To be fair, S&P Global assigns the company a stable outlook but notes rising business risk. Those risks could rise if Apple's lawsuit is successful.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Oracle, and S&P Global. The Motley Fool has a disclosure policy.