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The recent push in Texas to pause data center construction has sparked concerns across the AI industry. This applies in particular to cloud companies, which have driven the rapid development of these facilities amid rising demand.
Texas Governor Greg Abbott had some state agencies audit data center requests beginning in August. In September, he ordered the Texas Commission on Environmental Quality to halt the issuance of final permits for data center projects. This moratorium effectively paused all new data center development until at least December.
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The concerns that created these pauses aren't going away, and they were likely escalated after Gina Hinojosa's upset victory in the 2026 Texas gubernatorial election. The public sentiment around data centers is growing increasingly negative.
Most cloud companies have some business interests in Texas, but the most affected is likely to be Oracle (NYSE: ORCL). Fortunately, the current actions around data centers could create more of a buying opportunity than a risk to the stock.
The company chose areas around Abilene for its largest deployments, citing the region's capacity to generate wind and solar power. Moreover, it has placed capacity in the Dallas-Fort Worth area, as that is one of the world's most interconnected corridors for data centers. Furthermore, even though it plans to relocate its corporate headquarters from Austin to Nashville over the next few years, Austin remains its operational base for now and is a hub for hosting.
Fortunately, despite Oracle stock being on pace for its worst year since 2001, Oracle investors may not need to panic. For one, Hinojosa proposed a moratorium on new data centers, which does not apply to current facilities or those under construction. This gives the company the opportunity to build more outside of Texas if necessary.
Secondly, the moratorium would presumably remain in effect only until new regulations are in place. Hence, the change in leadership may only have minimal effects on Oracle's data center plans within the Lone Star State.
Oracle may also be in better financial shape than the many bears fear. Admittedly, the data center construction boom is the main factor in its more than $125 billion in total debt, a level well above the company's $67 billion book value.
Still, in the first quarter of fiscal 2027 (ended Aug. 31), revenue of $19 billion increased by 30% from the same quarter last year. Most of that growth came from the cloud segment, which accounts for 60% of total revenue.
Nonetheless, the other 40% consists of its legacy businesses. Should the cloud segment struggle, these other enterprises could provide Oracle with stability. This gives Oracle stock an advantage over a company like CoreWeave, which is totally dependent on the cloud for its revenue.
Moreover, investors should note that Oracle's fiscal Q1 net income of nearly $4.8 billion rose 63% from the year-ago period. Since that figure also includes $1.4 billion in interest expenses, Oracle can presumably afford to service its loans.
Amid debt concerns, the cloud stock now trades near 52-week lows. However, its 20 P/E ratio is close to its lowest valuation since the pandemic. That could make the stock worth buying despite the risks of its Texas exposure.
Although Oracle has heavy exposure to Texas, it appears well-positioned to manage the state's political shift.
Hinojosa's proposed moratorium on data center construction would only apply to future projects, leaving Oracle's current Texas operations unaffected.
Additionally, Oracle benefits from rapid expansion, bolstered by well-established legacy businesses, providing both growth and stability. When considering its discounted stock price and ability to service its considerable debt load, Oracle investors probably do not need to worry about Texas's political shift.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.
Texas Wants to Rethink Data Center Construction. Here's the AI Stock Most Exposed. was originally published by The Motley Fool
