Oracle allayed market fears about low AI profits. Will the rally continue?

Oracle, one of the leaders in the artificial intelligence race, eased investor concerns about the profitability of its critical new AI infrastructure business, Bloomberg reported. The company shared gross margin expectations from building and leasing data centers for AI projects, after which its shares rose sharply. Earlier, The Information wrote that Oracle's margins on leasing AI infrastructure aren't actually very high, which worried the market.

Shares of Oracle jumped 4% within a minute in trading on October 16 after the company showed analysts at a conference in Las Vegas a slide in which it attributed low gross margin to the rapid growth of data center costs, writes Barron's. The company presented investors with a calculation: an AI infrastructure project with total revenue of $60 billion over six years could generate a gross margin of 35%. This has eased Wall Street's concerns about the profitability of one of the company's key new businesses, Bloomberg says. Gross margin reflects the share of revenue remaining after deducting the cost of production.

Oracle also updated its long-term outlook for its AI cloud server rental business - Oracle Cloud Infrastructure - raising its estimate for expected revenue by 2030 from $144 billion to $166 billion, which assumes a compound annual growth rate of 75% from the $10 billion level in fiscal 2025, Barron's writes. Revenue for all of Oracle is expected to reach $225 billion by fiscal 2030, with earnings per share of $21, MarketWatch reports.

The new projections are based on Oracle's order book, which now exceeds half a trillion dollars. However, $300 billion of this amount falls on a single multi-year contract with OpenAI. It is still an open question whether OpenAI will be able to find the funding needed to fulfill its obligations, the publication notes.

On the other hand, Oracle announced seven new contracts with four customers, including a cloud agreement with Meta (owner of Instagram and Facebook): this shows that the company is reducing its reliance on a narrow number of partners, according to MarketWatch.

Oracle shares rose about 5% after the announcement and ended the day up 3%. However, the stock fell 2% in the post-market. CoreWeave, another provider of AI infrastructure solutions, also jumped 1.8%.

Oracle in recent weeks and months has signed massive contracts to build AI-focused data centers with customers such as OpenAI, Meta Platforms and Elon Musk's xAI startup. While such deals have supported the company's market capitalization, investors have expressed concerns about how profitable the business will prove to be.

In early October, The Information reported that Oracle's cloud segment may have had margins as low as 14% on a number of recent AI contracts. "Given that this business is in its infancy, it is likely that margins will improve in the coming years," the analyst added.

"The announcement [at Oracle's conference] may help reduce anxiety about low profitability," Bloomberg Intelligence analyst Anurag Rana wrote.

Oracle's advantage is its ability to combine software with infrastructure, Baird senior analyst Rob Oliver said before the company's presentation. "Oracle has a huge business in a key area that is absolutely critical to what is driving this infrastructure investment, which is data. Generative AI is impossible without data," Oliver noted in a statement to MarketWatch.

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