Oracle's $300 Billion Stargate Deal with OpenAI Sparks Investor Fears Over AI Bubble and Tech Valuations

Oracle's landmark $300 billion agreement to provide cloud infrastructure for OpenAI, known as Project Stargate, is at the center of growing investor skepticism about the sustainability of the AI investment boom. The deal, announced in late 2024, commits Oracle to building some of the world's largest data center complexes to power OpenAI's ambitions, requiring an estimated 4.5 gigawatts of power. The partnership was solidified at a White House event with former President Donald Trump, who framed it as a national jobs initiative.

However, this massive bet is occurring against a backdrop of increasing market tension. Investors are questioning the valuations of AI-linked stocks as major tech companies face slowing growth, massive capital expenditures, and doubts about monetization. "We're in the phase of the cycle where the rubber meets the road," said Jim Morrow of Callodine Capital Management. "It's been a good story, but we're sort of anteing up at this point to see whether the returns on investment are going to be good."

The financial strain is evident. OpenAI itself is reportedly on track to burn through $115 billion by 2029 before reaching positive cash flow, having raised $40 billion from backers like SoftBank. Oracle, for its part, saw its free cash flow turn negative for the first time since 1992 due to the immense costs of building out this infrastructure, leading to a spike in its credit risk to levels not seen since 2009. The company is relying on tens of billions in bond issuance and external financing, such as a $38 billion loan to Vantage Data Centers, to manage the burden.

This trend extends beyond Oracle. Alphabet, Microsoft, Amazon, and Meta are projected to spend over $400 billion on capital projects, primarily data centers, in the coming year. Depreciation costs from this building spree are soaring, expected to hit $30 billion next year for some firms, potentially affecting shareholder returns like buybacks and dividends.

While valuations for major tech stocks like Nvidia, Alphabet, and Microsoft remain below 30 times earnings, pockets of extreme speculation exist, such as Palantir trading at over 180 times estimated profit. The core fear is that growth rates may not accelerate further. "These stocks correct when the growth rate doesn't accelerate any further," noted Sameer Bhasin of Value Point Capital. Analysts warn that if the massive AI investments fail to generate expected returns, a significant market rotation, if not a crash, could follow.