Oracle shares fall as its spending on artificial intelligence increases

Oracle shares fell more than 10% in extended trading after announcing a jump in spending on artificial intelligence data centers and other equipment, spending that is taking longer to turn into cloud computing revenue than investors would like. Cloud computing sales in the fiscal second quarter rose 34% to $7.98 billion, while revenue in the company’s closely watched infrastructure business rose 68% to $4.08 billion. Both figures were slightly lower than analysts’ estimates. Oracle is best known for its database software, but it has recently found success in the competitive cloud computing market. It is participating in a massive expansion of data centers to power OpenAI’s artificial intelligence work, and companies such as ByteDance’s TikTok and MetaPlatforms are major customers in its cloud services. Remaining performance obligations, a measure of bookings, jumped more than fivefold to $523 billion in the quarter ended Nov. 30, the company said in a statement Wednesday. Analysts had estimated an average of $519 billion, according to data compiled by Bloomberg. However, Wall Street has raised doubts about the costs and timelines needed to develop AI infrastructure on such a large scale. Oracle has taken on large amounts of debt and has committed to leasing several data center locations. Also read: The Bank of England warns: The debt-financed artificial intelligence boom is at risk of collapse. Jacob Bourne, an analyst at eMarketer, said: “Oracle is facing increasing scrutiny over its debt-financed data center expansion and concentration risks, amid questions about the effects of the uncertainty associated with spending on artificial intelligence.” He added: “This loss of revenue is likely to raise concerns among investors who are already wary of its deal with OpenAI and its aggressive spending on artificial intelligence.” Capital spending pressures investor expectations Investors want to see Oracle turn its high infrastructure spending into revenue as quickly as promised. Capital spending, a measure of data center spending, was about $12 billion in the quarter, compared with $8.5 billion in the prior period. In September, the company forecast capital expenditures of $35 billion for the fiscal year. Analysts had expected $8.25 billion in capital spending in the quarter. Oracle now expects its capital spending to reach about $50 billion in the fiscal year ending in November 2026, an increase of $15 billion from September expectations, executives said in a phone call after the results were released. “The vast majority of our capital investments are for revenue-generating equipment that goes into our data centers, not land, buildings or energy, which are collectively covered by leases,” Chief Financial Officer Doug Kehring said on the call. Also Read: Are We Seeing an Artificial Intelligence Bubble? The bond market doesn’t think so. “Oracle does not pay for these contracts until the completed data centers and associated facilities are delivered to us,” he added. Annual revenue will reach $67 billion, confirming forecasts the company made in October. “As a fundamental principle, we expect and are committed to maintaining our investment grade debt rating,” Kehring added. The stock has lost a third of its value since September. The stock hit a low of $197.25 in extended trading after closing at $223.01 in New York. The stock has lost about a third of its value since Sept. 10, when investor enthusiasm for Oracle’s cloud business pushed the company to a record high. “Oracle is very good at building and operating high-performance, cost-effective cloud data centers,” Clay McGuirk, an Oracle executive, said in the statement. “And since our data centers are highly automated, we can build and operate more of them,” he added. This is the company’s first earnings report since Maguirk and Mike Cecilia, who share the CEO position, succeeded Safra Katz, the former CEO. Part of the negative investor sentiment in recent weeks is related to growing doubts about the prospects for OpenAI’s business, which faces increased competition from companies such as Alphabet’s Google, Kirk Mattern, an analyst at Evercore ISI, wrote in a note ahead of the earnings release. Also read: Why are fears rising over a trillion-dollar artificial intelligence bubble? He added that investors would like to see Oracle management explain how spending plans can be adjusted as demand for Open AI changes. Revenue and Earnings Results and Ampere Deal Details In the quarter, total revenue rose 14% to $16.1 billion. Oracle’s cloud software business rose 11% to $3.9 billion. This is the first quarter in which Oracle’s Cloud Infrastructure division generated more sales than its Applications division. Earnings, excluding certain items, were $2.26 per share. The company said the profit benefited from the sale of Oracle’s stake in chip manufacturing company Ampere Computing. The deal generated a pre-tax profit of $2.7 billion in the period. Ampere, which received early backing from Oracle, was acquired by Japanese conglomerate SoftBank in a deal closed last month. Also Read: Oracle and Meta Consider $20 Billion Artificial Intelligence Computing Deal In the current period, which ends in February, total revenue will rise between 19% and 22%, while cloud computing sales will rise between 40% and 44%, according to what Kehring said on the call. Expectations were in line with analysts’ estimates.