Oracle Corp. Stock experienced its sharpest decline in nearly a year, following the company's increased investment in AI data centers and related infrastructure. These elevated expenditures are proving slower to convert into cloud income than shareholders anticipate.
TL;DR
- Oracle's stock fell sharply due to increased AI data center investments, exceeding analyst expectations.
- The company anticipates capital spending to reach $50 billion by May 2026, a significant increase.
- Elevated expenditures are converting slower into cloud income than shareholders expect.
- Oracle's credit risk indicator reached a 16-year high amid concerns over debt and AI spending.
Capital outlays, a measure of data center investment, reached approximately $12 billion for the quarter, up from $8.5 billion in the prior period, the firm stated on Wednesday. According to information gathered by Bloomberg, analysts had projected $8.25 billion in capital investment for the quarter.
Oracle now anticipates its capital spending will approach $50 billion for the fiscal year concluding in May 2026, representing a $15 billion rise from the projection made in September, according to executives speaking on a conference call following the release of its financial results.
Oracle's stock dropped 11% to $198.85 by Thursday's market close in New York, marking its largest one-day decrease since January 27th. Prior to Wednesday's closing, Oracle's stock had already seen a depreciation of approximately one-third of its worth since its peak on September 10th. Concurrently, an indicator of Oracle's credit risk attained a new 16-year high.
The most recent financial statement and stock decline signify a change in luck for a business that, only a short time ago, was experiencing a rapid surge and securing massive data center agreements with entities such as OpenAI. The profits temporarily elevated co-founder Larry Ellison to the planet's wealthiest individual, as the technology mogul surpassed Elon Musk for a brief period.
Renowned for its database solutions, Oracle has recently achieved prominence in the fiercely contested cloud computing arena. The company is undertaking a substantial expansion of its data centers to support AI operations for OpenAI, and it also lists entities like ByteDance Ltd.’s TikTok and Meta Platforms Inc. Among its significant cloud clientele.
During the fiscal second quarter, cloud sales saw a 34% rise, reaching $7.98 billion, and the company's keenly observed infrastructure division experienced a 68% revenue jump to $4.08 billion. These figures were slightly below what market watchers had predicted.
Nonetheless, financial markets have expressed uncertainty regarding the expenses and duration needed for building AI infrastructure on an immense scale. Oracle has secured substantial amounts of borrowed funds and pledged to rent numerous data center locations.
The expense of insuring the firm's debt against failure for a five-year period increased by up to 0.17 percentage points, reaching approximately 1.41 percentage points annually, marking the highest intraday figure since April 2009, as reported by ICE Data Services. This indicator climbs when investor assurance in the company's financial standing declines. Oracle's credit derivatives have emerged as a key indicator of AI-related risk within the credit market.
“Oracle faces its own mounting scrutiny over a debt-fueled data center 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.”
The remaining performance obligation, a metric for bookings, surged over five times to $523 billion during the quarter concluding on November 30th. Forecasters, on average, had projected $519 billion.
Shareholders are looking for Oracle to convert its increased outlays on infrastructure into earnings at the pace it has pledged.
“The vast majority of our cap ex investments are for revenue generating equipment that is going into our data centers 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 centers and accompanying utilities are delivered to us.”
“As a foundational principle, we expect and are committed to maintaining our investment grade debt rating,” Kehring added.
Oracle's expenditure of cash rose during the quarter, and its free cash flow fell to a negative $10 billion. In total, the corporation carries approximately $106 billion in liabilities, based on figures assembled by Bloomberg. “Investors continually seem to expect incremental cap ex to drive incremental revenue faster than the current reality,” stated Mark Murphy, a financial expert at JP Morgan.Play Video
“Oracle is very good at building and running high-performance and cost-efficient cloud data centers,” Clay Magouyrk, one of Oracle’s two chief executive officers, said in the statement. “Because our data centers 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.
Kirk Materne, an analyst at Evercore ISI, noted in a pre-earnings memo that a portion of the negative investor sentiment lately stems from growing doubt regarding OpenAI's business outlook, as it faces heightened rivalry from entities such as Alphabet Inc.’s Google. He further stated that investors are keen for Oracle's leadership to clarify their approach to modifying expenditure strategies should OpenAI's demand fluctuate.
During the quarter, overall income grew 14 percent to $16.1 billion. The firm's cloud software application division saw an 11 percent increase, reaching $3.9 billion. This marks the initial quarter where Oracle's cloud infrastructure segment achieved higher revenue than its applications operations.
Excluding certain items, the earnings reached $2.26 per share. The company stated that the profit was boosted by the sale of Oracle’s holdings in chip manufacturer Ampere Computing. This resulted in a pretax profit of $2.7 billion during the quarter. Ampere, which initially received support from Oracle, was acquired by SoftBank Group Corp. Of Japan in a deal finalized last month.
For the present quarter, concluding in February, overall income is projected to climb between 19% and 22%, with cloud-based transactions seeing a rise of 40% to 44%, according to Kehring's remarks during the discussion. These projections aligned with what industry experts had anticipated.
Annual revenue will be $67 billion, affirming an outlook the company gave in October.
