Oracle (ORCL) shares experienced a 3% dip on Tuesday following a report from The Information suggesting potential challenges within the company’s burgeoning cloud business, specifically concerning the rental of Nvidia chips. The report casts a shadow on Oracle’s ambitious plans to leverage Nvidia’s advanced GPUs to power its cloud offerings, potentially impacting profitability.
Internal data cited in The Information report indicates that Oracle’s Nvidia-powered cloud division achieved gross margins of 14% on $900 million in sales during the three months leading up to August. This figure is significantly lower than Oracle’s overall gross margin, which hovers around 70%. This discrepancy raises concerns about the financial viability of Oracle’s strategy to compete with cloud providers in the AI compute space. The crux of the issue lies in the high cost of acquiring Nvidia’s state-of-the-art GPUs and the aggressive pricing Oracle employs to attract customers to its AI chip rental services.
Oracle’s aggressive push into the cloud and artificial intelligence sectors has fueled significant growth in recent quarters. In September, the company reported a staggering 359% year-over-year increase in its backlog of cloud contracts, now referred to as remaining performance obligations. Oracle projects substantial revenue growth in its cloud infrastructure segment, forecasting $144 billion in revenue by 2030, a significant leap from the $10 billion estimated for 2025.
A substantial portion of this anticipated revenue is linked to Oracle’s involvement in the “Stargate” project, a collaboration with OpenAI. This initiative involves the establishment of five large-scale data centers equipped with Nvidia AI chips. This partnership underscores Oracle’s commitment to providing the computational power necessary for OpenAI’s demanding AI workloads, representing a strategic move to solidify its position in the rapidly growing AI infrastructure market. Industry analysts believe the success of Stargate is crucial to Oracle achieving its ambitious cloud revenue targets. However, the current margin pressures, as highlighted by The Information’s report, suggest that Oracle needs to carefully manage costs and optimize its pricing strategy to ensure long-term profitability in this competitive landscape. The dynamics between hardware acquisition costs, cloud service pricing, and customer demand will be critical factors in determining Oracle’s success in the AI-driven cloud market.
Year-to-date stock chart for Oracle.
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