Why Oracle Stock Dropped Today

Oracle (ORCL -4.16%) stock tumbled 5% through 11 a.m. ET, as investors rethink their enthusiasm for the longtime database software company that's turned into a red-hot play on artificial intelligence (AI) through its relationship with OpenAI. And why? Turns out the answer has nothing to do with artificial intelligence at all. Today, it's all about TikTok. Image source: Getty Images. Oracle's paying for TikTok, but what will it get? It's been about a week since rumors began floating that the deal to sell TikTok's U.S. operations to a consortium of American companies is accelerating -- rumors that named Oracle as a prominent player. Today, multiple news outlets report further details on how the deal might proceed. For example, AP says private equity shop Silver Lake Partners, alongside billionaires Rupert Murdoch and Michael Dell may join Oracle in investing in "TikTok U.S." -- 20% of which will remain owned by China's ByteDance. More interesting than who's buying, though, is what they're getting for their money. Specifically, Oracle et al. may not be allowed to "buy" TikTok, but only license a copy of the algorithm, and perhaps exercise some control over what kinds of data get fed into it (as well as control the data it generates). Is Oracle stock still a buy? I suspect this is the detail that's giving investors pause today. While keeping U.S. data in domestic hands is certainly an improvement, if all ByteDance does is lease Oracle a black box version of its algorithm, with no insight into or ability to change the code within, that seems less helpful -- and less valuable to Oracle. Absent an outright sale, Oracle should insist on at least a full source code license giving it full access to the TikTok algorithm's underlying codebase. Anything less than that, and Oracle stock is probably not worth its present 75 times earnings valuation.