Oracle might have an OpenAI problem.
Oracle (ORCL) stock has tumbled over 40% from its September peak, erasing more than $360 billion from its market capitalization. Nearly $67 billion of that decline occurred on Thursday alone, as Oracle’s second quarter results failed to assuage a key concern for investors — that the company is too heavily reliant on OpenAI (OPAI.PVT).
Oracle’s AI-fueled growth targets outlined in its first quarter sent the stock to a record on Sept. 10, briefly making its founder, Larry Ellison, the world's richest man. In September, the company told investors its remaining performance obligations (RPO) — or the value of its future revenue from customer contracts signed — had soared nearly 360% to $455 billion.
It was later revealed that ChatGPT developer OpenAI accounted for at least $300 billion of its customer commitments as part of the Stargate project. Since then, its stock has struggled.
Rising concerns about OpenAI’s mounting costs — set to hit $1.4 trillion due to its deal spree with firms including Nvidia (NVDA), CoreWeave (CRWV), AMD (AMD), and Broadcom (AVGO), in addition to Oracle — and increasing competition from Google's (GOOG) Gemini models have made investors even more wary.
"Clearly there's been a reversal in terms of the market's perception of OpenAI in the last couple of months," BNB Paribas analyst Stefan Slowinski told Yahoo Finance. “The OpenAI ecosystem obviously has been suffering as a result.”
Slowinski and other Wall Street analysts agree that OpenAI’s potential inability to pay for its wide-ranging AI infrastructure commitments is Oracle’s biggest risk.
Read more: How to protect your portfolio from an AI bubble
OpenAI CEO Sam Altman declared a “code red” last week as the upstart faces greater rivalry from Google, threatening its ability to monetize its AI products and meet its ambitious revenue targets.
"[Oracle is] in this tough situation where they have to build out [data center] capacity for this customer and borrow a lot of money to do that when there's a very high uncertainty this customer will be able to pay for that capacity," DA Davidson analyst Gil Luria said.
Oracle’s second quarter results this week only deepened investor concerns.
The company’s $12 billion in capital expenditures was higher than expected, just as its free cash flow loss of $10 billion was much heavier than the $6 billion outflow anticipated. Oracle also substantially hiked its full-year capital expenditures forecast to $50 billion from $35 billion.
Executives’ attempts to quell worries over the company's high debt load, rising costs, and dependence on OpenAI didn’t help.
In a call following Oracle’s earnings report, new co-CEO Clay Magouyrk said the company has more than 700 AI customers. He said Oracle could easily redirect its AI infrastructure to service other customers in “hours” if demand from any single customer fails to materialize.
"If there were an issue where OpenAI couldn't pay their bills, they have the quick ability to repurpose the infrastructure for other customers," TD Cowen analyst Derrick Wood explained in an interview.
The company also said it won’t need to spend more than $100 billion to complete its data center projects and committed to maintaining an investment-grade credit rating — as investors have fretted over its BBB rating on its bonds, just notches away from junk status. Oracle also highlighted that its RPO grew by $68 billion in the latest quarter due to new commitments from Nvidia, Meta (META), and other customers.
Slowinski said that, in theory, such commentary should have appeased investors. But broader concerns over the payoff on tech firms’ investments in AI prevented that.
"Right now, the market's just saying, 'We don't have confidence in the returns and all this capex,'” he said.
Laura Bratton is a reporter for Yahoo Finance. Follow her on Bluesky @laurabratton.bsky.social. Email her at [email protected].
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