Oracle shares plunge on mounting AI spending
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Oracle shares fell 11 per cent on Dec 11, while a measure of its credit risk reached a fresh 16-year high.
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NEW YORK – Oracle shares plunged the most in almost 11 months on Dec 11 after the company escalated its spending on artificial intelligence (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 (S$15.5 billion) in the quarter, an increase from US$8.5 billion in the preceding period, the company said on Dec 11. Analysts anticipated US$8.25 billion in capital spending in the quarter, according to data compiled by Bloomberg.
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 its second-quarter results were released.
The shares fell 11 per cent to US$198.85 in New York, the biggest single-day decline since Jan 27. Oracle’s stock had already lost about a third of its value through Dec 10 since a record high on Sept 10. Meanwhile, a measure of Oracle’s credit risk reached a fresh 16-year high.
The latest earning report and share slide marks a reversal of fortunes for a company that just a few months ago was enjoying a blistering rally and clinching multibillion-dollar data centre deals with the likes of OpenAI. The gains temporarily turned co-founder Larry Ellison into the world’s richest person, with the tech magnate passing Elon Musk for a few hours.
Known for its database software, Oracle has recently found success in the competitive cloud computing market.
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.
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 points 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 barometer 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 Mr 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.
“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,” Oracle 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.”
“As a foundational principle, we expect and are committed to maintaining our investment grade debt rating,” Mr 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 cap ex to drive incremental revenue faster than the current reality,” wrote Mr Mark Murphy, an analyst at JPMorgan.
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 Mr 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.
In the current period, which ends in February, total revenue will increase 19 per cent to 22 per cent, while cloud sales will increase 40 per cent to 44 per cent, Mr Kehring said on the call. Both forecasts were in line with analysts’ estimates.
Annual revenue will be US$67 billion, affirming an outlook the company gave in October. BLOOMBERG
