Oracle Slides on AI Spending, Erases More than $100B in Market Value

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Oracle Corp. shares plunged by the most since January, erasing more than $100 billion in market value, after the company escalated its spending on AI data centers and other equipment, rising outlays that are taking longer to translate into cloud revenue than investors want. Capital expenditures, a metric of data center spending, were about $12 billion in the quarter, an increase from $8.5 billion in the preceding period, the company said Wednesday in a statement. Analysts anticipated $8.25 billion in capital spending in the quarter, according to data compiled by Bloomberg.  Fiscal second-quarter cloud sales increased 34% to $7.98 billion, while revenue in the company’s closely watched infrastructure business gained 68% to $4.08 billion. Both numbers fell just short of analysts’ estimates.  The share decline is the biggest intraday drop since January, and at one point had the stock on track to close with its steepest one-day drop since 2001. Oracle’s stock had already lost about a third of its value through Wednesday’s close 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 center 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. It’s engaging in a massive data center build-out to power AI work for OpenAI and also counts companies such as ByteDance Ltd.’s TikTok and Meta Platforms Inc. as major cloud customers.  Remaining performance obligation, a measure of bookings, jumped more than fivefold to $523 billion in the quarter, which ended Nov. 30. Analysts, on average, estimated $519 billion. Bloomberg's Robert Schiffman joined Carol Massar and Tim Stenovec on 'Bloomberg Businessweek Daily' to break it down. 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 center 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 point 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-fueled data center build-out and concentration risk amid questions over the outcome of AI spending uncertainty,” said 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.  Oracle now expects capital expenditures will reach about $50 billion in the fiscal year ending in May 2026 — a $15 billion increase from its September forecast — executives said on a conference call after the results were released. “The vast majority of our cap ex investments are for revenue generating equipment that is going into our data centers and not for land, buildings or power that collectively are covered via leases,” Principal Financial Officer Doug Kehring said on the call. “Oracle does not pay for these leases until the completed data centers and accompanying utilities are delivered to us.” Annual revenue will be $67 billion, affirming an outlook the company gave in October. “As a foundational principle, we expect and are committed to maintaining our investment grade debt rating,” Kehring added. Oracle’s cash burn increased in the quarter and its free cash flow reached a negative $10 billion. -------- Watch Bloomberg Radio LIVE on YouTube Weekdays 7am-6pm ET WATCH HERE: http://bit.ly/3vTiACF Follow us on X: https://twitter.com/BloombergRadio Subscribe to our Podcasts: Bloomberg Daybreak: http://bit.ly/3DWYoAN Bloomberg Surveillance: http://bit.ly/3OPtReI Bloomberg Intelligence: http://bit.ly/3YrBfOi Balance of Power: http://bit.ly/3OO8eLC Bloomberg Businessweek: http://bit.ly/3IPl60i Listen on Apple CarPlay and Android Auto with the Bloomberg Business app: Apple CarPlay: https://apple.co/486mghI Android Auto: https://bit.ly/49benZy Visit our YouTube channels: Bloomberg Podcasts: https://www.youtube.com/bloombergpodcasts Bloomberg Television: https://www.youtube.com/@markets Bloomberg Originals: https://www.youtube.com/bloomberg Quicktake: https://www.youtube.com/@BloombergQuicktake