The largest cloud computing deal in history, codenamed "Stargate," originated from an inconspicuous LinkedIn message, marking Oracle co-founder Larry Ellison's high-stakes bet. However, Wall Street's enthusiasm is now cooling.
In spring 2024, an OpenAI executive privately messaged Oracle's sales team via LinkedIn. At the time, OpenAI was desperately seeking computing power, while Oracle had just freed up capacity from Elon Musk's shelved xAI project in Texas. By January, the two companies, alongside SoftBank, announced the $300 billion "Stargate" AI data center project at the White House with former President Trump. The deal briefly propelled Oracle's market value by $250 billion, making Ellison the world's richest person temporarily.
But the frenzy is fading. Once a symbol of AI optimism, Oracle has now become a bellwether for market anxiety. From its September peak to December earnings, Oracle's stock plunged over 30%. To fulfill contracts, the company reported negative free cash flow for the first time since 1992. Wall Street traders are buying Oracle credit default swaps—the same instruments used to short the housing bubble during the 2008 financial crisis.
**The Birth of the Mega-Deal** The unprecedented transaction began when OpenAI's infrastructure lead Peter Hoeschele contacted Oracle's sales team. Originally, Oracle had planned X-shaped data centers in Texas for Musk's xAI before the billionaire abandoned the project. OpenAI's timely outreach led to a $300 billion server leasing agreement requiring five massive data center complexes, consuming 4.5 gigawatts—more power than all Chicago households combined. However, reports emerged on Friday about potential construction delays until 2028 due to material shortages, which Oracle promptly denied.
**Financial Strain and Bubble Warnings** Oracle's aggressive expansion comes with massive financial pressures. Building these facilities requires tens of billions in upfront investment amid soaring construction costs—Microsoft spent $40 million just on concrete for one Wisconsin data center. Energy access poses another hurdle, forcing Oracle to use expensive gas generators in rural Texas at $1 billion annually per site.
Through off-balance-sheet financing, Oracle has kept much AI-related spending off its books. Real estate developer Vantage Data Centers is borrowing $38 billion to build two campuses for Oracle under 15-year leases. Analysts estimate Oracle could face $70 billion in cash burn before potential returns.
KeyBanc's Jackson Ader notes: "OpenAI's commitments are inversely correlated with Oracle's stock. Each new pledge diminishes the value of prior ones." After disappointing earnings and Broadcom's weak AI chip orders, Oracle shares extended losses, while Broadcom plummeted 11% Friday.
**Microsoft's Cautious Contrast** Microsoft, OpenAI's primary cloud partner since 2016, grew wary of dedicating excessive capacity to the startup. CEO Satya Nadella revealed in October that OpenAI's request for dedicated multi-gigawatt training data centers "made no sense" for Azure's business. Microsoft eventually relinquished its right of first refusal on OpenAI's other cloud deals.
**The $1.4 Trillion Question** Oracle's profitability hinges on OpenAI maintaining its explosive growth—a risky assumption as AI's economic impact remains unproven. The "Stargate" deal allows OpenAI to renegotiate after five years, potentially leaving Oracle with stranded assets if AI adoption slows.
At 81, Ellison remains central to Oracle's AI ambitions, personally overseeing spending decisions. While bullish on AI being "bigger than the Industrial Revolution," even he faces questions about overcommitting to an unproven future.
DA Davidson's Gil Luria outlines three scenarios: "Oracle revises forecasts downward, OpenAI collapses, or AGI emerges making all this spending irrelevant." With transformative AI breakthroughs delayed, Oracle's gamble may determine whether the industry sees a boom or a historic bubble.
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