Oracle (ORCL 2.43%) popped 3% on Monday after TikTok published a press release outlining details of the newly formed TikTok U.S. Data Security Joint Venture.
Oracle, private equity firm Silver Lake, and Abu Dhabi-based investment company MGX each hold 15% equity stakes in the joint venture and will serve as its managing investors. A slew of nonmanaging investors own a total of 35.1%, and China-based ByteDance will retain the remaining 19.9%.
U.S. user data will be hosted on Oracle Cloud, with Oracle serving as the "trusted security partner" for software assurance.
With this new joint venture in place, buying Oracle stock is now the simplest way to invest in TikTok's U.S. operations. But TikTok won't be enough to turn Oracle's stock around -- as perhaps is indicated by the fact that Monday's gains were not sustained. And with the stock down by more than 47% from its 52-week high, here's what investors should focus on instead.
Image source: Getty Images.
TikTok is a small part of Oracle
Reports indicate the joint venture is valued at roughly $14 billion, making Oracle's stake worth around $2.1 billion. That's not a large amount relative to the tech giant's market cap of around $500 billion. The more valuable part of the deal may be the platform's partnership with Oracle Cloud, but investors should wait to hear more about that on Oracle's next quarterly earnings call.
Although the TikTok deal could add meaningfully to the company's earnings, Oracle's investment thesis remains heavily centered around its artificial intelligence (AI) investments in Oracle Cloud Infrastructure (OCI).
The stock surged last September after the company announced a blockbuster deal with OpenAI valued at around $300 billion. In its December quarter, Oracle said its OCI remaining performance obligations (contract backlog) surged to $523 billion. But investors are concerned about the company's roadmap to converting those promised revenues into actual sales -- especially given Oracle's leveraged balance sheet.
NYSE: ORCL
Key Data Points
Oracle's bets are bold, but strategic
While some may view Oracle's AI-related spending as excessive, its strategy is more cautious than it may be getting credit for.
Oracle's financials look terrible right now, with free cash flow turning negative and debt piling up. But that's only because Oracle is in the midst of the most critical and innovative stage of its data center buildout.
Over the next couple of years, its capital expenditures should decline, and cash flow should soar as it begins bringing in revenue from its new data centers. And while the company will be vulnerable to a pullback in AI spending -- especially from a key customer like OpenAI -- there's reason to believe it could simply redirect capacity to different customers if it needed to.
The valuation reflects the risks
Trading at just 25 times analysts' earnings estimates for its fiscal 2026 (which ends May 31) and 23.2 times fiscal 2027's estimated earnings, many of the risks Oracle faces are already baked into its share price.
The stock is therefore an excellent buy for risk-tolerant investors, but expect Wall Street to cut Oracle little to no slack in the case of project delays or further financial strains. With that in mind, investors who don't have as much conviction in Oracle's path to potentially becoming one of the largest AI cloud infrastructure providers by 2031 may want to take a wait-and-see approach to the stock.
