Oracle shares ended trading on October 7 with a 2.5% decline. Investors reacted nervously to The Information's report that the profitability of the company's cloud business was lower than expected due to high costs of renting processors from Nvidia. Since the beginning of the year, Oracle securities have risen in price by about 70%, but most Wall Street analysts still recommend investors to buy them.

Details

For three summer months, cloud services provider Oracle received about $900 million in revenue from renting servers based on Nvidia chips, but the gross profit in this area amounted to only $125 million, reported The Information with reference to internal company documents. At the same time, in some cases, according to its data, Oracle in general received significant losses from the lease of small batches of video cards Nvidia.

An Oracle spokesman declined to comment to Bloomberg on the matter.

What does that mean

Oracle's cloud contract margins may be understated initially until full revenue begins to flow, Guggenheim analyst John DiFucci noted in a conversation with Bloomberg. However, he said it's unlikely the company would agree to terms with gross margins of less than 25 percent over the life of the contract, he said.

"Oracle has become the de facto standard for AI model training because of its optimal price-to-performance ratio," DiFucci said. - The low price is achieved not by dumping, but because the company can charge less and still maintain a comfortable profit margin."

Large-scale expenditures on chip purchases and data center construction are putting pressure on the company's overall gross margin (excluding operating expenses). According to Oracle's latest financial report, gross margin was 67.3% - the lowest level in more than a year, Bloomberg notes.

What about the stock

Shares of Oracle at the end of trading on October 7 fell by 2.5% to $284.2. During the day, the quotations fell by 7%.

Despite the short-term drawdown, Oracle shares have gained about 70% since the beginning of the year, helped by the rapid growth in demand for infrastructure for artificial intelligence. In September, the company said revenue from its cloud business could grow 700% over three fiscal years, after which the stock jumped 36% during the day on Sept. 10. According to WSJ, Oracle struck a major deal with OpenAI, which affected the company's forecast.

In late September, Rothschild & Co Redburn analyst Alex Heissl initiated coverage of Oracle stock with a Sell rating (sell advice). Heissl believes the market is overestimating the company's cloud contract revenue, even with Oracle's involvement in Stargate with OpenAI, a massive AI infrastructure initiative. However, that view runs counter to the Wall Street consensus: about 70% of analysts tracking Oracle stock recommend investors buy it (Buy and Overweight ratings), according to MarketWatch data

This article was AI-translated and verified by a human editor

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