Oracle Stock Has Given Back Its Earnings Gains. Does It Have an OpenAI Problem?

Oracle’s offices in Redwood City, Calif. (David Paul Morris / Bloomberg)

Key Points

• Oracle’s stock surged 36% on Sept. 10 after reporting a more than $300 billion increase in customer contract obligations.
• The increase in Oracle’s obligations included a $300 billion contract with OpenAI.
• Oracle’s stock has declined 26% since Oct. 16, following its ‘AI World’ conference.

It’s back to the grind for Oracle stock.

While the shares leapt 36% on Sept. 10, they had given up all of those gains by midday on Friday. The company reported mixed earnings on Sept. 9, but also said that its remaining obligations under its customer contracts had risen by more than $300 billion as of the end of the its fiscal first quarter from $138 billion three months earlier.

Questions emerged even as the stock soared in response to the news. The Wall Street Journal reported that $300 billion of the increase was a single contract with artificial-intelligence start-up OpenAI, a company that has quickly rising revenue, but also significant losses. OpenAI confirmed the contract two weeks later.

Early Friday, Oracle stock was down 4.5% to $232.74, leaving shares down 3.6% since the earnings call.

Created with Highcharts 9.0.1Oracle has given up all of its Sept. 10 share-price surge.Oracle Corp.Source: FactSet

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While Oracle’s market capitalization shot up on the backlog news, the gain was based on a contract that may never be fulfilled. Even if OpenAI were to begin to generate cash flow, $300 billion is a lot of money, and the company has made another roughly $1 trillion of commitments to Microsoft , Nvidia and Advanced Micro Devices , and others.

As investors continued to weigh the prospects for Oracle’s AI cloud business in mid-October following the company’s “AI World” conference, more questions emerged.

Even if OpenAI finds $300 billion to pay Oracle, how will Oracle finance the capital buildout required to fulfill its end of the contract? Where will all the power come from? Will there be sufficient profit from all that investment?

Those questions, plus doubts about the short-term outlook for the AI trade, were enough to wipe out the post-earnings surge.

Oracle stock is down 26% from its closing level on Oct. 16, the day before the AI World conference, while the S&P 500 is up 1.4%.

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