Following Oracle’s contract backlog of over $400 billion that excited the stock market, doubts have emerged about its dependence on OpenAI and its debt-driven datacenter expansion, which will be a focus in Wednesday’s earnings report.
Previously a minor player, Oracle has become a major provider of the rented computing power crucial for generative AI, thanks to its partnership with ChatGPT’s creator, OpenAI.
Oracle is competing with industry leaders like Amazon, Microsoft, and Google for a share of the lucrative AI market as companies and startups increasingly seek access to these capabilities.
This year, Oracle and other major cloud providers are expected to invest more than $400 billion in AI infrastructure.
Analysts note that a significant portion of Oracle’s capital expenditure is linked to OpenAI-related datacenters, raising investor concerns due to the lack of clarity on how OpenAI, valued at $500 billion but still unprofitable, plans to fund its over $1 trillion spending by 2030.
There’s also growing concern that the AI-driven valuation surge may be a bubble due to limited real-world application, leading to a selloff in Oracle’s stocks and bonds.
Oracle’s stock has lost all gains from a 36% spike on September 10 after announcing the backlog in its last earnings, though shares remain up nearly a third for the year.
Meanwhile, its five-year credit default swaps, which offer bondholders protection against default, have reached record highs as the company continues to borrow heavily for datacenter expansion.
“While the outlook for the quarter is positive, investors are likely to focus on the AI expansion fundamentals and its financial impacts,” Bernstein analyst Mark Moerdler noted for the fiscal second-quarter results.
The $300 billion OpenAI data-center deal gives Oracle “unprecedented single customer revenue exposure,” he added.
To ease concerns, Oracle stated in October it expects cloud infrastructure revenue to reach $166 billion by fiscal 2030, with new bookings from various customers, not just OpenAI. It also highlighted a new $20 billion deal with Meta Platforms.
For now, AI is projected to drive significant growth at Oracle, with cloud infrastructure revenue expected to rise 71.3% in the September-November period, surpassing the previous quarter’s 55% growth, according to Visible Alpha data.
This growth would reflect the strong performance reported by cloud giants Amazon, Microsoft, and Google Cloud in their recent earnings.
Overall, Oracle’s revenue is expected to increase 15.3% to $16.21 billion, marking the fastest growth in over two years, based on LSEG data. Net profit is anticipated to rise 13.3%.
After a review questioned its cloud deal margins, Oracle stated it expects adjusted gross margins between 30% and 40% for AI cloud infrastructure, with other segments like cloud software for businesses having margins between 65% and 80%.
If OpenAI fails and the contract is terminated, Oracle would need to scale back expansion, write off some contracts, and reduce debt, but would not default, said Gil Luria, analyst at D.A. Davidson.
If “OpenAI achieves super-intelligence, spends $1.4 trillion, none of us will need to work again, and Oracle will be fine,” he commented.
