Oracle Stock Slumps as Management Discusses Outlook

Oracle’s meeting for analysts comes about a month after the company reported solid first-quarter earnings. (Justin Sullivan/Getty Images)

Key Points

• Oracle stated its AI cloud server-rental business has a 35% gross margin over a contract’s life. An article published last week said it was 14%.
• Oracle raised its 2030 revenue forecast for Oracle Cloud Infrastructure from $144 billion to $166 billion.
• The news came at an afternoon-long briefing for analysts.

Oracle stock slumped even as executives reassured investors about the profitability of a business renting servers to AI companies and discussed the broader financial outlook over the next five years.

Investors have been looking for clarity from Oracle ever since The Information published an article that said gross profit margins at the company’s fast-growing AI cloud server-rental business were surprisingly low at 14%. The stock dropped 2.5% that day.

On Thursday, Oracle presented a slide at a briefing for analysts that attributed the low gross margin to the rapid expansion of data-center expenses before customer contracts go live. That fits with the article in The Information, which said the time between when Oracle finishes preparing its data centers for use and when customers start paying is a financial burden for the company.

But according to Oracle, the actual gross margin across the entire life of the contract is 35%. The stock shot up almost 3% at that point in the presentation. The Information didn’t respond to a request for comment.

As a point of contrast, CoreWeave is a competing AI cloud provider that is also expanding rapidly. It had a 51% gross profit margin in its most recent quarter.

Oracle also updated its long-term outlook for the AI cloud server-rental business, Oracle Cloud Infrastructure, raising its forecast of projected 2030 revenue from $144 billion to $166 billion. That would represent a 75% annual growth rate from $10 billion in fiscal 2025.

Oracle shares were up 3.1% at the close of trading Thursday, but shifted suddenly in after-hours trading as CFO Doug Kehring outlined companywide targets through 2030.

The new estimates were a significant upgrade from the outlook a year ago at the 2024 analyst meeting. Then, Oracle projected $104 billion in 2029 revenue, but the new target is for $185 billion that year and $225 billion in 2030. Management now expects both revenue and earnings per share to grow at around 30% a year.

It is unclear why the stock took such a pounding on what appeared to be good news. The selloff continued into Thursday, with shares down 6.8% in midday trading.

Underlying the new projections is Oracle’s backlog of contracted work, now over half a trillion dollars. But $300 billion of that is a single multiyear cloud contract with OpenAI. It remains to be seen if OpenAI can find the funding to fulfill its end of the bargain, and how Oracle will finance and find electrical power for the data-center buildout required to fulfill this contract.

Analysts remain bullish.

“The company modeled its long-term outlook as pursuing customers based on profit potential, while staying focused on cost discipline, and utilizing a variety of financing options for growth,” analysts at KeyBanc Capital Markets wrote in a note following the analyst day.

The KeyBanc analysts reiterated an Overweight rating on Oracle and $350 price target on the stock, which finished at $313 on Thursday.

Ben Reitzes of Melius Research was even more bullish, raising his price target on Oracle shares to $400 with a Buy rating.

“Demand for AI workload capacity has reached unprecedented levels due to massive inferencing growth from reasoning models. Oracle is emerging as a major beneficiary,” Reitzes wrote in a note.

The market, however, seems to be taking another view. It won’t be the last time.

Write to Adam Levine at adam.levine@barrons.com