Oracle Stock Slides On Report Its Cloud Business Is Seeing Lower Margins On Nvidia Chips
Oracle (ORCL) stock slid Tuesday following a report that the company has slim profit margins on AI cloud computing compared to the rest of its business. AI bullishness and cloud growth has been key to Oracle stock's rally over the past 12 months.
Oracle collected roughly $900 million in revenue but only $125 million in gross profit from renting cloud-based servers with Nvidia (NVDA) chips to other businesses during its August-ended quarter, according to a report from The Information, which cited internal documents. That translates to a roughly 14% gross profit margin, The Information noted, compared to roughly 70% margins for the rest of the business. The internal document shows the "financial challenge" in renting servers with Nvidia chips, as the publication described.
Oracle declined to comment.
Shares of the software giant turned sharply lower following the report, which published late morning. On the stock market today, Oracle stock was down nearly 4% at 280.05 in recent trades.
Oracle has placed a big bet on its ability to rent servers equipped with Nvidia graphics processing units (GPUs) to AI startups and other enterprises through its cloud infrastructure business. It has paid off for Oracle stock. Shares had rallied nearly 70% this year entering trading Tuesday.
But Oracle has pulled back by nearly 20% from a record high of 345.72 that its stock reached on Sept. 10. Oracle stock surged that day after the company reported fiscal first-quarter earnings and revealed its backlog of cloud-related work had reached $455 billion in contracted revenue as of August, a 359% jump from a year earlier. A growing partnership with OpenAI is a major contributor to that growth. The startup signed a five-year deal with Oracle valued at $300 billion for cloud computing services, according to a Wall Street Journal report on Sept. 10.
Oracle stock fell below its 21-day moving average for the first time since its most recent rally began in early September.
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The slide comes amid questions about how the company will fund the data center capacity required to fulfill that demand.
Other AI stocks were moved by the report on Tuesday as well. Nvidia's roughly 2% gain for the day was cut down to a fractional overall increase. AI-focused "neocloud" providers CoreWeave (CRWV)and NebiusGroup (NBIS) were down as well.
Wall Street analysts defended Oracle in notes to clients following the report and subsequent sell-off. Stifel analyst Brad Reback said he previously forecast roughly 16% gross margins for Oracle's cloud business.
"While it's entirely possible new, sub-scale, GPU workloads are below the ~25% level, we believe that as this OCI segment scales, gross margins should meaningfully improve," Reback wrote in a client note. "We expect to hear much more about this, as well as significant out-year operating expenses leverage, at next week's analyst day."
Oracle is hosting an analyst day next week as part of its "AI World" conference in Las Vegas.
Guggenheim analyst John DiFucci, meanwhile, wrote that there is a lag between when Oracle builds cloud infrastructure and when its recognizes revenue for renting those servers.
"We wouldn't be surprised to see lower gross margin contribution at the beginning of an AI training deal before the revenue starts, but we believe it's reasonable to expect any deal to be at least 25% gross margin over its life – or Oracle wouldn't sign it," DiFucci wrote.
Both DiFucci and Reback rate Oracle stock as a buy.
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