Oracle’s OpenAI reliance faces scrutiny as debt-fueled AI buildout raises worries

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By Aditya Soni

Dec 9 (Reuters) – Months after Oracle’s $400 billion-plus contract backlog ignited a stock-market frenzy, the enthusiasm has given way to doubts about its reliance on OpenAI and debt-fueled datacenter buildout, which will dominate its earnings on Wednesday.

A smaller player in the cloud market for a long time, Oracle this year staked claim as one of the bigger providers of the rented computing power essential for generative AI thanks to its tie-up with ChatGPT-creator OpenAI.

It is vying with industry giants Amazon.com, Microsoft and Google for a piece of the lucrative market as companies adopt AI and startups developing the technology rush to secure access to capacity.

Oracle along with other big cloud players is expected to spend more than $400 billion on AI infrastructure this year. 

Analysts have said a big portion of Oracle’s capital expenditure is tied to OpenAI-related datacenters. That has sparked investor worries as details are scarce on how OpenAI – valued at $500 billion but still unprofitable – plans to fund its spending, which total more than $1 trillion by 2030.

Concerns have also mounted that the AI boom driving up valuations is turning into a bubble amid a lack of real-world adoption for the technology, sparking a selloff in Oracle’s shares and bonds. 

STOCK SELLOFF

Its stock has eroded all the gains from a stunning 36% jump on September 10 after it announced the backlog at its last earnings, even as shares remain higher by nearly a third for the year.

Meanwhile, its five-year credit default swaps, which offer bondholders a hedge against default, have shot to record highs as it borrows heavily for the datacenter buildout.

“While the setup for the quarter is good, investors are likely to be more focused on the fundamentals of the AI build-out and its financial implications,” Bernstein analyst Mark Moerdler said in a note for the fiscal second-quarter results.

The $300 billion OpenAI data-center contract gives Oracle “unprecedented single customer revenue exposure”, he said. 

To allay some of the concerns, Oracle had said in October it expects cloud infrastructure revenue to grow to $166 billion in fiscal 2030 and that fresh bookings were coming in from a range of customers, not just OpenAI. It also touted a $20 billion new deal with Meta Platforms. 

UPBEAT EARNINGS EXPECTED

For now, AI is expected to drive strong growth at Oracle, with cloud infrastructure revenue expected to surge 71.3% in the September-November period, faster than the 55% growth seen in the prior quarter, according to data from Visible Alpha.

That would mirror the strong growth reported by cloud giants Amazon.com, Microsoft and Alphabet-owned Google Cloud in their latest earnings reports.

Overall, Oracle’s revenue is expected to rise 15.3% to $16.21 billion, which would mark the fastest pace in more than two years, according to data compiled by LSEG. Net profit is expected to increase 13.3%.

After a report raised questions about its margins from cloud deals, Oracle had said it expected to achieve adjusted gross margins of between 30% and 40% for delivering AI cloud computing infrastructure, while other segments such as more cloud software and infrastructure for business customers would have margins of between 65% and 80%.

If OpenAI fails and the contract goes away, Oracle would need to scale back the build out, write off some contracts and start working down the debt, but it would not default, said Gil Luria, analyst at D.A. Davidson. 

If “OpenAI achieves super-intelligence, spends $1.4 trillion, none of us have to ever work again, and Oracle is fine”, he said.

(Reporting by Aditya Soni in Bengaluru; Editing by Arun Koyyur)