Oracle Declines on Concerns About Fulfilling AI Cloud Demand

(Bloomberg) — Oracle Corp. fell the most in almost nine months after announcing its long-term financial outlook; This shows that investors expect a greater increase from their investment in artificial intelligence infrastructure.

Oracle, OpenAI, Meta Platforms Inc. and has signed multibillion-dollar deals to develop data centers to power AI efforts for customers like Elon Musk’s xAI. Last month, the company said its cloud infrastructure business would generate $144 billion in sales by fiscal 2030. Oracle on Thursday said total annual revenue will total $225 billion by then.

The real question is how quickly Oracle can provide the data centers needed to take advantage of all this demand, Bank of America analyst Brad Sills wrote. This is due to “supply constraints across land, buildings, energy, and GPUs,” he wrote.

Shares fell as much as 8.2% in New York on Friday, the steepest intraday drop since Jan. 27. The stock had gained 88% this year through Thursday’s close.

While these AI cloud bookings have increased the company’s valuation, investors have expressed concerns about the profitability of this endeavor. Oracle attempted to address this issue at its analyst day in Las Vegas on Thursday.

For example, the gross profit margin of an AI infrastructure project generating $60 billion in total revenue over six years would be 35%, the company said during a presentation. Gross margin represents the percentage of revenue that remains after the cost of producing goods and services.

The margin profile in this case is “revealing to even the largest customers,” Co-Chief Executive Clay Magouyrk said when speaking to analysts.

Anurag Rana, a Bloomberg Intelligence analyst, wrote that the announcement “could help alleviate concerns about lower profitability.” The Information reported last week that some of Oracle’s AI cloud arrangements recently had a margin of 14%. “Given that this business is still in its infancy, there’s a good chance profits will increase over the next few years,” Rana wrote.

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