Oracle Takes a Tumble as Investors Get Jittery About AI Spending
The risks are real; the market is right to price them into calculations
If you'll forgive my euphemistic turn of phrase, Oracle shares had another challenging day on the public markets, down about 4 ½ percent at close. Then again, if you’re partial to small victories, you’ll rejoice that Oracle’s stock performed than it did yesterday.
Oracle just raised a fresh red flag for investors worried that tech companies are getting ahead of themselves when it comes it their massive capex spending.
Oracle stock plunged 14% on Thursday after the tech giant reported an earnings beat but delivered revenue that was below Wall Street estimates, posting $16.06 billion compared to $16.21 billion expected by analysts. Cloud sales rose 34% from the previous quarter but also fell short of estimates.
Importantly, Oracle also pledged to spend about $15 billion more next year than previously forecast, sparking fresh concerns about aggressive capex among the biggest tech firms.
Friends in High and Low Places
Larry Ellison has many friends in Washington, D.C., but they can only do so much for him. Let me qualify that statement. There’s no question that having friends in the Trump Administration can help a technology company — why do you think nearly the entirety of Silicon Valley’s plutocracy presented their smiling faces, all in a row, at Trump’s inauguration? — and Oracle will benefit from the considerable transactional largesse that such relationships confer. In the final analysis, however, having friends of convenience in high (or low) places doesn’t change who and what you are.
Oracle, like all companies, has strengths and weaknesses. As the AI market develops, and moves from glistening novelty to workaday toolset (which, in all its quotidian banality, is where the longterm riches will be made), Oracle’s weaknesses might well count for more than its strengths.
It’s not quite the holiday season. I’m not yet feeling the comfort and joy and demented gladness that Yuletide promises, so allow me to constructively call attention to some of Oracle’s frailties. There’s a reason Oracle is spending commensurately more on datacenters and AI infrastructure than many of its competitors, including the likes of Google, Amazon, and Microsoft. The reason is readily apparent: Oracle is behind when it comes to having the real estate and IT infrastructure that are essential prerequisites for AI hegemony.
Another problem for Oracle is that it lacks the expertise and overall wherewithal to design and develop proprietary infrastructure, such as homegrown AI accelerators and optimized global network infrastructure, that would give it a technology-based competitive advantage over its principal rivals. Google and Amazon, and Microsoft to a lesser extent, are developing their own technology stacks, from silicon and network infrastructure all the way up to applications and services, that confer market differentiation, cost savings, increase technological independence, and streamlined operations. Oracle doesn’t depend on third-party vendors for everything it does, but has more dependencies than its largest competitors.
Like any company that has endured more than one generation of technological change, Oracle has evolved. Oracle, as you might recall, first made its reputation and its fortune as a purveyor of relational databases. The company added enterprise application software and hardware and software infrastructure in subsequent years, but it was slow to fully apprehend the commercial appeal and competitive threat of cloud infrastructure. For a while — too long, many would contend — Larry Ellison disparaged infrastructure as a service (IaaS), allowing Amazon and others to establish formidable, if not quite unassailable, leadership positions.
Oracle gradually put itself back into the cloud sweepstakes, though it remans a distant fourth to the top three providers. More recently, the advent of AI represents a shimmering chalice that might well be poisoned. The poison might not be lethal, but it could give you a chronic headache.
On the one hand, Oracle sees AI as a vast, new market opportunity, a potential inflection point for share gains against the cloud giants. At the same time, however, AI requires stratospheric capital expenditures., dwarfing the daunting capital outlays that were necessary for cloud dominance.
Pay Exorbitantly To Play
Oracle confronted a choice that wasn’t much of a choice at all: potentially miss out on the AI bonanza, which nobody seems willing to do, or redouble capital spending to earn an exclusive seat at the high-stakes AI table. To the surprise of nearly nobody, Oracle chose to pursue the latter option.
For the most part, the market approved, but now that the AI bubble has grown stretched and attenuated, investors are anxious. What if the market implodes, what if the presumed bottomless demand for AI services turns out to have a hard floor?
As Bill Gates said recently, AI can ultimately thrive as a useful technology and still leave behind the corporate carcasses of many would-be AI startups. Markets invariable follow that pattern. Enthusiasm and exuberance generates a rising tide that lifts nearly all boats, including those that are unseaworthy or helmed by knaves, but eventually the tide recedes. It’s at that point that only the most buoyant and proficiently navigated vessels avoid becoming shipwrecks.
I’m not suggesting that Oracle, a company with a long-established enterprise franchise and relatively robust financial reserves, will scupper itself when the tide recedes. Only less experienced and unseasoned companies will meet that dark fate. What I will posit is that, of all the major cloud providers rushing toward the pot of gold at the end of the AI rainbow, Oracle has the most ground to cover. The costs associated with covering that ground will be immense, leaving Oracle at risk of imperial overstretch when the market’s reality intrudes. Risks will be heightened to the extent that Oracle borrows lavishly from some of the financial wide boys setting up shop as private creditors.
Recent reports indicate that Oracle’s free cash flow has turned negative as it attempts to spend its way into an improved competitive position in the AI derby. Oracle might navigate its way through the treacherous seas and competitive landscape, somehow managing to close ground on the AI Big Three while also holding off the challenge of Chinese hyperscalers and sovereign players in other geographic regions. What is certain, however, is that the risks of Oracle falling short of its goal should be priced into any investment calculation.