BREAKINGVIEWS-Small AI deflation causes high-pitch Oracle squeak

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Dec 11 (Reuters Breakingviews) - It’s not quite panic, but some leakage from the artificial intelligence hype bubble is creating an awfully high-pitched squeal. Technology giant Oracle’s ORCL.N latest results reveal the painful cash burn of its massive data center building spree. Chair Larry Ellison said that the $550 billion company will only pick up the pace. That sent its stock crashing over 14% at market open on Thursday, erasing over $90 billion in value. Yet by one measure, it’s now about in-line with the wider market. Add in a muted reaction to Oracle’s key partner OpenAI inking a major agreement with Walt Disney, DIS.N and investor AI mania seems to be cooling, but only from a crazed peak.

Oracle’s revenue grew 13% year-over-year in the quarter, to $16.1 billion. If everything goes to plan, multiples of that will arrive in the future. Remaining performance obligations, a measure of expected revenue from contracts, rose $68 billion to $523 billion.

The snag is the attached cost. While Oracle’s operations produced $2 billion of cash, capital expenditure was $12 billion. The cash burn is getting worse, and the company raised its expected spending for the fiscal year ending in May from $35 billion to $50 billion.

That’s making investors nervous — witness the surging cost to purchase default insurance on Oracle’s debt — as is the company’s reliance on OpenAI. A $300 billion deal between the two accounts for much of Ellison’s anticipated lucre. Perhaps this capacity could be sold to another firm should the cash-guzzling startup fail, but the price might be a fraction of what Oracle expects.

The disquiet extends elsewhere. For a while, all a company had to do was announce a relationship with OpenAI to enjoy a massive stock pop. On Thursday, media giant Walt Disney agreed to invest $1 billion in OpenAI and license characters to its Sora video generator, an unusual step for the usually jealously guarded rights to Star Wars, Marvel and other characters. Yet Disney’s stock only rose 1%, trifling compared to the uplift enjoyed when, say, chipmaker Nvidia invested NVDA.O in OpenAI.

Step back, however, and it’s hard to see this as complete capitulation. By midday, Oracle stock was up over 16% for the year to date, barely behind the benchmark S&P 500 Index .SPX. Some excess excitement – Oracle doubled between January and September – has now evaporated. The fact Oracle’s stock is still up despite its rapid cash incineration, and OpenAI is still signing deals left and right despite declaring a “code red” threat to its business, suggests louder, more concerning noises may still be coming.

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CONTEXT NEWS

Oracle reported on the evening of December 10 that it had generated revenue of $16.1 billion for the quarter ending November 30, an increase of 13% from the same period a year prior. Remaining performance obligations, a measure of future revenue from contracts, rose $68 billion during the quarter to $523 billion.

The company said cash flow from operations during the quarter was $2.1 billion, while capital expenditure was $12 billion. Oracle raised its estimate for capital expenditure in its fiscal year ending in May from $35 billion to $50 billion.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))