Oracle (ORCL) is facing significant challenges as it grapples with investor concerns over its reliance on OpenAI (OPAI.PVT). Since reaching a peak in September, Oracle’s stock has plummeted nearly 40%, erasing more than $360 billion in market capitalization. A staggering $67 billion of that decline came on Thursday, following the company’s second-quarter results, which failed to alleviate worries about its dependence on OpenAI’s financial health.
The momentum Oracle experienced in September was largely fueled by optimistic growth targets tied to artificial intelligence. The company reported that its remaining performance obligations (RPO)—the total value of future revenue from customer contracts—had surged nearly 360% to $455 billion. However, it was later disclosed that OpenAI accounted for approximately $300 billion of these commitments through its Stargate project, raising alarms among investors about the sustainability of Oracle’s growth.
Compounding these concerns are rising operational costs for OpenAI, projected to reach $1.4 trillion due to extensive partnerships with major tech firms, including Nvidia (NVDA), CoreWeave (CRWV), AMD (AMD), and Broadcom (AVGO). As competition intensifies, particularly from Google’s (GOOG) Gemini models, investors are increasingly wary about OpenAI’s capacity to meet its financial obligations, which analysts believe is Oracle’s most significant risk.
“Clearly, there’s been a reversal in terms of the market’s perception of OpenAI in the last couple of months,” stated BNB Paribas analyst Stefan Slowinski. “The OpenAI ecosystem obviously has been suffering as a result.” This shift in sentiment is echoed by other Wall Street analysts who express skepticism about OpenAI’s ability to finance its extensive infrastructure commitments.
OpenAI CEO Sam Altman recently issued a “code red,” signaling heightened competition from Google and the potential threat to OpenAI’s revenue-generating capabilities. Analysts like DA Davidson’s Gil Luria emphasize the precarious position Oracle finds itself in, noting that the company must invest heavily in data center capacity for OpenAI while facing uncertainty about its customer’s ability to pay for that infrastructure.
In its latest earnings report, Oracle’s second-quarter results further fueled investor apprehensions. The company’s capital expenditures reached $12 billion, exceeding expectations, while its free cash flow loss of $10 billion was significantly greater than the anticipated $6 billion outflow. Additionally, Oracle raised its full-year capital expenditures forecast to $50 billion from an earlier estimate of $35 billion, adding to the prevailing anxiety.
Executives attempted to address concerns regarding Oracle’s debt load and high costs during a call following the earnings report. Co-CEO Clay Magouyrk highlighted that the company now has over 700 AI customers and asserted that Oracle could quickly redirect its AI infrastructure to serve other clients if demand from OpenAI diminishes. TD Cowen analyst Derrick Wood noted, “If there were an issue where OpenAI couldn’t pay their bills, they have the quick ability to repurpose the infrastructure for other customers.”
Oracle reassured investors that it would not need to exceed $100 billion to finish its data center projects and committed to maintaining an investment-grade credit rating. This is crucial as concerns linger over its BBB rating, which is perilously close to junk status. The company also reported a $68 billion increase in RPO during the last quarter, attributed to new commitments from notable clients like Nvidia and Meta (META).
Despite these attempts to instill confidence, Slowinski observed that broader concerns about the returns on tech firms’ AI investments have hindered Oracle’s recovery. “Right now, the market’s just saying, ‘We don’t have confidence in the returns and all this capex,’” he remarked. This ongoing uncertainty raises questions about the stability of Oracle’s growth trajectory and its reliance on a single customer in a rapidly evolving industry.
As Oracle navigates these turbulent waters, the broader implications for the technology sector are significant. The interplay between AI infrastructure investments and the financial viability of companies like OpenAI may dictate not only Oracle’s future but also the fortunes of other firms in the AI space.
See also
Tech Giants Unveil “Athena”: Revolutionary AI Model Set to Transform Industries
Broadcom Secures $21 Billion TPU Order from Anthropic to Boost AI Infrastructure
Oracle’s $50B AI Spending Plan Backfires, Sparks 15% Stock Drop and Market Reassessment
