Oracle Stock Declines Amid Concerns Over AI Cloud Profit Margins
Oracle's stock fell sharply following reports of slim profit margins in its AI cloud services, raising investor concerns about the profitability of its AI initiatives.
Oracle Corporation's stock experienced a significant decline on Tuesday, dropping nearly 4% to $280.05, after reports revealed slim profit margins in its AI cloud services.
According to internal documents cited by The Information, Oracle generated approximately $900 million in revenue from renting cloud-based servers equipped with Nvidia chips during the quarter ending in August, but only achieved a gross profit of $125 million, translating to a 14% gross profit margin. This is substantially lower than the company's overall gross margin of around 70%.
The report highlighted the financial challenges associated with renting servers featuring Nvidia chips, noting that in some instances, Oracle incurred significant losses on rentals of both newer and older Nvidia GPUs.
Oracle has been heavily investing in its AI cloud infrastructure, aiming to rent servers with Nvidia GPUs to AI startups and enterprises. This strategy has contributed to a nearly 70% rally in Oracle's stock this year. However, the recent revelations have raised questions about the profitability of these ventures.
In response to the report, Oracle's stock fell below its 21-day moving average for the first time since its recent rally began in early September.
Other AI-related stocks were also affected. Nvidia's earlier gains were reduced to a fractional increase, and AI-focused cloud providers like CoreWeave and Nebius Group saw declines.
Analysts have weighed in on the situation. Stifel analyst Brad Reback noted that while initial GPU workloads might have lower margins, scaling the Oracle Cloud Infrastructure segment should lead to meaningful improvements.
Guggenheim analyst John DiFucci pointed out that there is often a lag between building cloud infrastructure and recognizing revenue from server rentals. He suggested that initial lower gross margins could be expected before revenue ramps up, but over the life of a deal, margins should reach at least 25%.
Both analysts maintain a 'buy' rating on Oracle stock, indicating confidence in the company's long-term prospects despite current margin concerns.
Source
Investor's Business DailyRelated News
Fact-checking
Fact-check the facts of the article using external sources and databases.