Oracle's stock tanks amid lingering doubts about an AI bubble – could this be the wake-up call investors have been fearing?
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Lily Jamali, North America Technology Correspondent, San Francisco
The shares of the cloud computing powerhouse Oracle dropped by over 10% in after-hours trading on Wednesday, triggered by quarterly earnings that didn't meet Wall Street's lofty expectations. This dip highlights growing unease in the market about whether the AI hype is sustainable.
Oracle reported total revenues of $16.06 billion (equivalent to about £11.99 billion) for the three-month period ending in November, falling just short of the $16.21 billion that analysts had predicted. But here's where it gets controversial – amid these figures, the company celebrated a 14% increase in revenue growth, driven largely by a whopping 68% jump in sales from its AI-focused division, Oracle Cloud Infrastructure (OCI). For beginners, OCI is essentially the backbone of Oracle's cloud services, providing the computing muscle that powers artificial intelligence projects for big players in the tech world.
These AI services have been a lifeline for major developers, fueling Oracle's stock to record highs this autumn. Yet, Wednesday's results didn't soothe investors' worries about a possible AI bubble – that speculative frenzy where excitement over new tech leads to inflated values that could pop unexpectedly. And this is the part most people miss: Oracle's deep ties to AI innovators might actually be exposing it to risks if the bubble bursts.
Flash back to September, when Oracle struck a blockbuster deal with OpenAI, the creators of ChatGPT. OpenAI committed to buying $300 billion in computing power from Oracle over five years – a deal so massive it temporarily crowned Oracle's chairman and chief technology officer, Larry Ellison, as the world's richest person. It's like a tech fairy tale, but with real financial stakes.
Still, Oracle's shares have plummeted 40% from their peak three months ago, even though they're up more than a third since the year's start. In his statement on Wednesday, Ellison adopted a wary approach, emphasizing the need for adaptability in the fast-evolving AI landscape. 'There are going to be a lot of changes in AI technology over the next few years and we must remain agile in response to those changes,' he cautioned.
Ellison also subtly distanced Oracle from Nvidia, the leading maker of advanced AI chips, by pledging a 'chip neutrality' policy. This means Oracle isn't locked into one supplier; instead, they'll source chips from whoever best meets their clients' needs. 'We will continue to buy the latest GPUs from Nvidia, but we need to be prepared and able to deploy whatever chips our customers want to buy,' Ellison stated. For those new to this, GPUs are specialized processors that supercharge AI computations, similar to how a high-performance engine boosts a race car's speed.
But here's where it gets really controversial: Oracle's extensive AI partnerships have sparked whispers of 'circular financing' – a situation where companies essentially fund each other to buy their own products or services. Imagine a group of friends lending each other money to buy each other's goods; it might look profitable on paper, but it raises questions about true value. Emarketer analyst Jacob Bourne pointed out that Oracle's earnings come at a time when investors are scrutinizing the firm's huge OpenAI tie-up, wondering if it means too much reliance on a partner that's under fire for profitability issues. 'Oracle's earnings arrive as investors weigh whether its massive OpenAI partnership might mean overexposure with a customer currently in the spotlight over profitability concerns,' Bourne noted.
Bourne also highlighted concerns over Oracle's mounting debt, amassed to build out data centers – those massive warehouses of servers that store and process data, essential for AI workloads.
On the flip side, not everyone sees it as doom and gloom. Cory Johnson, Chief Market Strategist at Epistrophy Capital Research, called it 'nothing but a great quarter for Oracle,' praising the 14% revenue growth as a sign of acceleration. He reminded us that, including the September OpenAI agreement, Oracle has secured $385 billion in deals over six months, with new clients like Meta and Nvidia jumping on board. 'But AI sentiment is so bad right now, that's seen as a bad thing for Oracle,' Johnson added, suggesting that current market pessimism is clouding judgment.
To fund this expansion, Oracle pulled off a historic $18 billion bond sale in September – one of the biggest debt raises in tech history.
'Although Oracle's shares are buoyed by its September surge, this revenue miss will likely exacerbate concerns among already cautious investors about its OpenAI deal and its aggressive AI spending,' Bourne warned.
Adding another layer, the Ellison family – known supporters of former US President Donald Trump – recently acquired Paramount and are pushing for a takeover of Warner Brothers Discovery, another Hollywood giant.
Do you believe Oracle's aggressive AI investments are a smart long-term play, or is the company risking too much in a potential bubble? And what about that 'chip neutrality' stance – brilliant strategy or a shot at Nvidia? Share your opinions in the comments and let's debate!
