Trade Tracker: Malcolm Ethridge buys more Zscaler

Here's a detailed summary of the provided YouTube transcript:

Key Concepts

• Oracle's Financial Situation: Concerns surrounding Oracle's debt, credit default swaps (CDS), and future financing plans, particularly in relation to its AI infrastructure investments.
• Credit Default Swaps (CDS): Financial derivatives used to hedge against the risk of a borrower defaulting on their debt.
• Hyperscaler Mega Bond Deals: Large bond issuances by major cloud providers, offering alternative investment opportunities.
• AI Trade: Investment strategies focused on companies involved in artificial intelligence.
• Cybersecurity Sector: The performance and investment outlook for cybersecurity companies, specifically Zscaler.
• Annual Recurring Revenue (ARR): A key metric for subscription-based businesses, indicating predictable revenue.
• Z-Flex Model: Zscaler's platform approach to cybersecurity.

Oracle's Credit and Equity Concerns

The discussion highlights significant concerns regarding Oracle's financial health, particularly its creditworthiness and equity performance.

• Equity Decline: Oracle's stock has experienced a brutal month, down 22% month-to-date.
• Credit Risk: Morgan Stanley has reiterated its view that risk is skewed to the downside for Oracle's credit.
• Credit Default Swaps (CDS) Strategy:
  • Morgan Stanley's credit analysts initially recommended buying CDS on Oracle while hedging with long positions in its bonds.
  • This strategy has been revised. Following "basis compression" (a narrowing of the difference between CDS prices and bond yields), they now suggest removing the bond leg and maintaining outright protection via buying five-year CDS.
  • This shift indicates growing confidence in their bearish call on Oracle's credit.
• Underlying Issues: The market is seeking more clarity on the issues at the heart of Oracle's financial situation, which are not expected to resolve with the calendar turn.
• Drivers of Credit Pressure: Credit analyst Lindsay Tyler notes that pressure on Oracle's credit could increase as it takes out new construction loans, potentially driving more hedging by bondholders.
• Bondholder Sentiment Shift: Sentiment among bondholders has shifted this fall due to "hyperscaler mega bond deals" that offer attractive investment alternatives.
• Management Incentives: Growing concerns around Oracle's stock may incentivize management to outline a financing plan on its upcoming earnings call.
• Upcoming Earnings: Oracle's results are expected the week of December 8th.
• Future Debt Commitments: A key focus will be Oracle's future debt commitments. The current street estimate is $90 billion over the next three years.
• OpenAI Deal Reassurance: Analysts are questioning Oracle's ability to meet this target without reassurances from OpenAI regarding their five-year, $300 billion deal.

Investment Perspective on Oracle

The transcript includes an investor's perspective on Oracle, emphasizing caution.

• "When in Doubt, Don't": The investor adheres to this rule, finding "a lot of doubt" surrounding Oracle.
• Partial Position Sale: 50% of the investor's Oracle position was sold in October to take gains.
• Hesitation to Re-enter: Despite seeking opportunities to re-enter, the investor feels there is "too much smoke" to comfortably add more capital.
• Comparison to Meta: The investor contrasts Oracle with Meta, noting Meta's direct path to generating revenue from its data center investments. Oracle, in contrast, is perceived as lacking a similar direct revenue path from its AI infrastructure spending.
• Need for Clarity: The Oracle story requires continued reporting and clarity until its financial situation is more transparent.
• Recommendation: The investor advises staying away from Oracle for now.

Software Sector Performance and Cybersecurity

The discussion then shifts to the broader software sector and a specific cybersecurity company, Zscaler.

• Software ETF Performance: The Software ETF is experiencing its worst month since January 2022, though this is skewed by a few underperforming names.
• Zscaler Investment:
  • The investor discusses adding more to their Zscaler position.
  • Target Trim: A $10 trim of Zscaler's target price to $390 from $400 by Berenberg is deemed not significantly meaningful.
  • Market Disconnect: The investor argues that the market is doing a "disservice" by lumping cybersecurity names in with the broader software sector, contributing to their recent declines.
  • Post-Earnings Purchase: Zscaler was bought on Wednesday after its stock traded down approximately 10% following earnings.
  • Earnings Beat: The company reported 26% year-over-year growth in Annual Recurring Revenue (ARR) and beat expectations across the board.
  • Company Focus: Zscaler has refocused on its "Z-Flex" model, aiming to be the platform for many companies' cybersecurity needs.
  • Operational Strength: The company is described as "firing on all cylinders."
  • Growth Potential: The investor sees Zscaler as an opportunity to capture significant growth, comparing it to the high growth rates seen in companies like NVIDIA or Alphabet.
  • Valuation: While acknowledging Zscaler trades at a premium (around 45% of the Fortune 500 are securing their services), the investor views it as a great buying opportunity.

Conclusion

The transcript presents a cautious outlook on Oracle due to significant debt and financing concerns, contrasting it with the perceived stronger fundamentals and growth potential in certain cybersecurity names like Zscaler. The market's current sentiment and the need for greater clarity are key themes.