Oracle Corporation (ORCL) experienced a notable decline in stock value on Tuesday. This slump followed revelations regarding the company’s profit margins from its AI cloud computing sector, which are substantially lower than other divisions.
Decline in Oracle Stock
Reports indicate that Oracle generated approximately $900 million in revenue through its cloud-based services utilizing Nvidia (NVDA) chips during the quarter ending in August. However, only $125 million of this revenue contributed to gross profit, resulting in a gross profit margin of about 14%. In contrast, other segments of Oracle’s business have margins near 70%.
The Context of AI Business
This information, sourced from The Information, highlights the financial challenges associated with AI cloud services. Following the report’s publication, Oracle shares dropped nearly 4%, bringing the stock price down to $280.05.
Despite this setback, Oracle’s stock had previously surged nearly 70% this year, buoyed by strong cloud growth and AI optimism. The stock peaked at $345.72 on September 10, shortly after the company reported substantial fiscal first-quarter earnings and revealed a cloud-related backlog of $455 billion, a 359% increase year-over-year.
Strategic Partnerships and Future Prospects
Oracle’s collaboration with OpenAI has been pivotal to its recent growth, with a five-year cloud services agreement valued at $300 billion. However, the situation raises questions regarding funding for the data center capacity necessary to meet demand.
As AI-focused companies faced similar fluctuations, Nvidia’s stock, which initially rose by approximately 2%, witnessed a decrease alongside Oracle’s downturn.
Analyst Insights
- Stifel analyst Brad Reback noted previously expected gross margins of around 16% for Oracle’s cloud business.
- He anticipates that as the Oracle Cloud Infrastructure (OCI) sector scales, profit margins will improve significantly.
- Guggenheim analyst John DiFucci highlighted a lag in revenue recognition relative to the infrastructure build-out, suggesting that Oracle’s margins could rise to 25% or more as contractual agreements progress.
Both analysts maintain a “buy” rating on Oracle stock, reinforcing confidence in its long-term potential amidst current challenges. Oracle will further address these issues during its upcoming analyst day, part of the “AI World” conference in Las Vegas.
