Will Oracle Recover from potential server deal with xAI falls apart?

Two months ago, $Oracle(ORCL)$ shares soared on talks with Elon Musk's xAI to provide the infrastructure architecture for its supercomputing program, albeit still a multi-year lease of Oracle's $NVIDIA Corp(NVDA)$ chips.

xAI and Oracle were originally in talks to expand the scope of their existing agreement to lease Oracle's NVIDIA AI chips.But yesterday, negotiations between xAI and Oracle stalled.

1. Reason for termination:

   • Musk asked to build xAI supercomputer faster than Oracle expected

   • Oracle is concerned that xAI's preferred supercomputing location may not have access to adequate power supply

2. Existing agreement: xAI has previously leased 16,000 NVIDIA chips from Oracle, and this agreement will continue.

xAI's New Plans

1. Build your own data center: xAI plans to build its own AI data center in Memphis, Tennessee, USA.

2. Chip sourcing: xAI will buy chips directly, rather than renting servers from Oracle. xAI's NVIDIA chips are currently supplied by $Dell Technologies Inc.(DELL)$ and $SUPER MICRO COMPUTER INC(SMCI)$

3. Scale target: Musk previously revealed that xAI plans to reach its goal of using 100,000 NVIDIA H100 GPU chips by the second half of 2025.

Potential impact on Oracle

1. Short-term revenue loss:

   • The loss of a potential $10 billion blockbuster could have some impact on Oracle's cloud computing business revenues.Oracle shares were down nearly 5% at one point after the news was announced, reflecting the market's concern about the loss.

2. Long-term business development:

   • Lost opportunities to become a major infrastructure provider for xAI could impact Oracle's position in the AI infrastructure market.

   • Reduced opportunities to partner with potential AI unicorn companies could impact Oracle's influence in the AI ecosystem.

3. Competitive Market Landscape:

   • Oracle may be at a disadvantage against cloud giants such as Microsoft, Amazon and Google, which have entered into similarly sized partnerships with other AI companies such as OpenAI and Anthropic.

4. Technical capabilities questioned:

   • The inability to meet the speed and scale requirements of xAI may raise market questions about Oracle's technical capabilities and infrastructure flexibility.

5. Existing Business Stability:

   • The existing 16,000 chip lease agreement with xAI will continue and there will be no direct loss to Oracle in the near term.