US stocks stumble as AI trade takes a hit

The big news out from the Oracle AI World conference was broadly positive: that margins on cloud infrastructure can be as high as 35%, and that the company predicts $166 billion in infrastructure revenue by 2030.

And in the wake of that news, today UBS raised its price target for Oracle shares to $380 from $360, saying they are undervalued.

But investors appear to have some concerns about Oracle’s huge capex plans, which are fueled by huge AI infrastructure deals with OpenAI and Meta, as shares dropped over 7% in Friday trading.

Analysts have pointed to Oracle’s high cash burn as it pursues its AI build-out and potential financing needs as flies in the ointment that could blunt the impact of the company’s strong longer-term growth forecasts.

On Friday, Jefferies analysts wrote:

“Questions remain about ORCL’s capex requirements to meet growing demand, as there was no forward-looking commentary on capex at the Analyst Day. Capex will need to ramp in line with [Oracle cloud infrastructure] revenue growth, raising concerns about ORCL’s financing options to support this expansion.”

However, if that’s the reason why the stock is getting hit today, it would mark a distinct change in how investors are evaluating the AI trade. Companies have tended to be increasingly rewarded for their aggressive capex commitments to enhance the boom, based on optimism that investments in this would-be revolutionary technology will bear fruit.

Friday’s dip comes on the back of a strong run leading up to the yesterday’s investor conference, fueled by a flurry of AI headlines. Oracle shares have gained over 18% in the past three months and more than 70% so far this year, well outpacing the Nasdaq’s approximately 7% and 16% rise over the same time periods.

AST SpaceMobile, which provides cellular services from space, dove in early trading after Barclays analysts cut their rating on the shares to “underweight” (essentially a sell) from “overweight” (or a buy), citing “excessive” valuation on the still money-burning company. The fact that analysts went from “buy” to “sell” — with no momentary stop at a “hold” or “neutral” rating — makes it a fairly rare “double downgrade.”

They wrote:

“Valuation has run ahead of fundamentals... In our last update, we increased our price target from $38 to $60 as we took a more constructive view on pricing; we found it supportive that TMUS/Starlink launched a text only service for $10 per month and believe that AST products which will be richer (text, call, broadband) could see higher prices points. Since then the stock price has doubled from $48 to $95.7.”

With the shares up almost 120% over the last month through Thursday, and a price-to-forward-sales ratio of 140x — the Nasdaq Composite is around 5x — the stock might be due for a cooling-off period.