Oracle (ORCL) has invested heavily in infrastructure and strategic partnerships to bolster its position in the AI arms race. However, the stock’s valuation appears rich given the competitive landscape. Investors are becoming more sensitive to the risks of these AI investments, including the uncertainty on revenue generation, integration challenges, and strong competition from rivals with more advanced AI capabilities. With its elevated valuation, this poses a risk and suggests that there are downside risks to the current stock price. ORCL recently broke below a key support level at $135, which it has rallied back to and now acts as resistance. The relative performance of ORCL to the S & P 500 suggests that it is more likely to bounce lower than breakout above this key resistance level. And momentum has turned negative, suggesting further downside is likely. And if we dive into the business, ORCL trades at 30 times forward earnings, which is a significant premium to its historical median of 20 times. This reflects the optimism around the growth of its AI servers. However, with an impressive first wave of contracts with OpenAI and Fortune 500 companies, there are already signs of moderation to the pace they are bringing on new contracts. And compared to its peers, ORCL expected EPS growth rate of 14% is modest, especially when contrasted with competitors like META (21%) and AMZN (37%). Furthermore, Oracle’s recent cancellation of a significant cloud computing deal with Elon Musk’s xAI raises concerns about its ability to secure and maintain high-profile contracts. Options on ORCL are expensive, making it suitable for using a spread. To take advantage of the potential weakness, I’m looking to buy the October $130/$120 Put Vertical for a $2.68 Debit. This entails: Buying the October 18 $130 Puts @ $5.38 Selling the October 18 $120 Puts @ $2.70 The total potential profit on this trade is $732 per contract, if ORCL is below $120 at expiration, with a maximum risk of $268 per contract if ORCL is above $130 at expiration. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
