Oracle shares drop the most since 2001 on mounting AI spending
The stock has already lost about a third of its value through Wednesday’s close since a record high on Sep 10
[NEW YORK] Oracle shares fell the most in more than 24 years after the company reported a jump in spending on AI data centres and other equipment, rising outlays that are taking longer to translate into cloud revenue than investors want.
Capital expenditures, a metric of data centre spending, were about US$12 billion in the quarter, an increase from US$8.5 billion in the preceding period, the company said on Wednesday (Dec 10) in a statement. Analysts anticipated US$8.25 billion in capital spending in the quarter, according to data compiled by Bloomberg.
Fiscal second-quarter cloud sales increased 34 per cent to US$7.98 billion, while revenue in the company’s closely watched infrastructure business gained 68 per cent to US$4.08 billion. Both numbers fell just short of analysts’ estimates.
The shares plunged as much as 16 per cent after markets opened in New York on Thursday, their biggest intraday decline since March 2001, erasing about US$102 billion in market value.
Oracle’s stock had already lost about a third of its value through Wednesday’s close since a record high on Sep 10. Meanwhile, a measure of Oracle’s credit risk reached a fresh 16-year high.
Known for its database software, Oracle has recently found success in the competitive cloud computing market. It’s engaging in a massive data centre build-out to power AI work for OpenAI and also counts companies such as ByteDance’s TikTok and Meta Platforms as major cloud customers.
Remaining performance obligation, a measure of bookings, jumped more than fivefold to US$523 billion in the quarter, which ended Nov 30. Analysts, on average, estimated US$519 billion.
Still, Wall Street has raised doubts about the costs and time required to develop AI infrastructure at such a massive scale. Oracle has taken out significant sums of debt and committed to leasing multiple data centre sites.
The cost of protecting the company’s debt against default for five years rose as much as 0.17 percentage point to around 1.41 percentage point a year, the highest intraday level since April 2009, according to ICE Data Services. The gauge rises as investor confidence in the company’s credit quality falls. Oracle credit derivatives have become a credit market barometre for AI risk.
“Oracle faces its own mounting scrutiny over a debt-fuelled data centre build-out and concentration risk amid questions over the outcome of AI spending uncertainty,” said Jacob Bourne, an analyst at Emarketer.
“This revenue miss will likely exacerbate concerns among already cautious investors about its OpenAI deal and its aggressive AI spending.”
Investors want to see Oracle turn its higher spending on infrastructure into revenue as quickly as it has promised.
Oracle now expects capital expenditures will reach about US$50 billion in the fiscal year ending in May 2026 – a US$15 billion increase from its September forecast – executives said on a conference call after the results were released.
“The vast majority of our cap ex investments are for revenue generating equipment that is going into our data centres and not for land, buildings or power that collectively are covered via leases,” principal financial officer Doug Kehring said on the call. “Oracle does not pay for these leases until the completed data centres and accompanying utilities are delivered to us.”
Annual revenue will be US$67 billion, affirming an outlook the company gave in October.
“As a foundational principle, we expect and are committed to maintaining our investment grade debt rating,” Kehring added.
Oracle’s cash burn increased in the quarter and its free cash flow reached a negative US$10 billion.
Overall, the company has about US$106 billion in debt, according to data compiled by Bloomberg. “Investors continually seem to expect incremental CapEx to drive incremental revenue faster than the current reality,” wrote Mark Murphy, an analyst at JPMorgan.
“Oracle is very good at building and running high-performance and cost-efficient cloud data centres,” Clay Magouyrk, one of Oracle’s two chief executive officers, said in the statement. “Because our data centres are highly automated, we can build and run more of them.”
This is Oracle’s first earnings report since longtime chief executive officer Safra Catz was succeeded by Magouyrk and Mike Sicilia, who are sharing the CEO post.
Part of the negative sentiment from investors in recent weeks is tied to increased scepticism about the business prospects of OpenAI, which is seeing more competition from companies like Alphabet’s Google, wrote Kirk Materne, an analyst at Evercore ISI, in a note ahead of earnings. Investors would like to see Oracle management explain how they could adjust spending plans if demand from OpenAI changes, he added.
In the quarter, total revenue expanded 14 per cent to US$16.1 billion. The company’s cloud software application business rose 11 per cent to US$3.9 billion. This is the first quarter that Oracle’s cloud infrastructure unit generated more sales than the applications business.
Earnings, excluding some items, were US$2.26 a share. The profit was helped by the sale of Oracle’s holdings in chipmaker Ampere Computing, the company said. That generated a pretax gain of US$2.7 billion in the period. Ampere, which was backed early in its life by Oracle, was bought by Japan’s SoftBank Group in a transaction that closed last month.
In the current period, which ends in February, total revenue will increase 19 to 22 per cent, while cloud sales will increase 40 to 44 per cent, Kehring said on the call. Both forecasts were in line with analysts’ estimates. BLOOMBERG
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