Oracle's quarterly performance plunged by 30%. Analysts: "If the agreement with OpenAI is not adjusted, Oracle may be unable to fulfill its obligations."
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The database software giant Oracle is experiencing its worst quarterly decline in over twenty years.
In the fourth quarter, Oracle's stock price has plunged 30%. If there is no significant reversal in the next four trading days, it could mark the largest quarterly drop since the bursting of the internet bubble in 2001, when the stock price fell nearly 34%.
In September this year, OpenAI pledged to pay Oracle more than $300 billion, a deal that was seen as a major endorsement of Oracle’s cloud business. However, earlier this month, Oracle’s quarterly revenue and free cash flow both fell short of expectations, intensifying market concerns.
Wallstreetcn mentioned that Oracle’s results for the second quarter of its 2026 fiscal year missed expectations, and capital expenditure was about $15 billion higher than anticipated. Additionally, Oracle plans to sign $248 billion in leasing contracts to enhance its cloud computing capabilities.
Aggressive expansion has raised concerns over credit risk. On December 12, D.A. Davidson analysts wrote in a client report:
Given that Oracle is barely maintaining its investment-grade rating, we are concerned that Oracle may not be able to fulfill these obligations if the agreement with OpenAI is not adjusted.
The Frenzy and Pullback Triggered by the OpenAI Deal
New CEOs Clay Magouyrk and Mike Sicilia took over just three months ago, at a time when market optimism toward Oracle was unprecedented.
About two weeks before they took the reins from Safra Catz, Oracle reported a 359% increase in revenue reserves, mainly due to OpenAI’s commitment.
On September 10, after news reports about the OpenAI agreement were released, Oracle’s stock price soared nearly 36%, marking its third-largest single-day gain since its IPO in 1986, reaching a record intraday high of $345.72.
For a company that failed to make Gartner’s list of the world’s Top 5 cloud infrastructure providers in 2024, this deal was highly significant.
However, the optimism quickly faded as the market realized Oracle’s growth ambitions would require massive borrowing for support.
In September, the company raised $18 billion through a bond sale, one of the largest debt financings in tech history. Kehring promised during the earnings call to maintain an investment-grade rating, but some investors were not convinced, driving up the price of Oracle’s credit default swaps.
In addition to $50 billion in capital expenditures, Oracle also plans to sign $248 billion in leasing agreements to expand its cloud capacity.
This pace of expansion far exceeds industry norms, while Oracle still lags far behind Amazon, Microsoft, and Google in the cloud infrastructure market—it didn’t even make Gartner’s Top 5 global cloud infrastructure providers by revenue for 2024.
The Difficult Trade-off Between Growth and Profitability
In October this year, Sicilia, Magouyrk, and Kehring painted a blueprint for rapid growth.
By fiscal year 2030, revenue is projected to jump from $57 billion in 2025 to $225 billion, with most growth coming from its AI infrastructure business centered on Nvidia GPUs.
But this “hyper-growth” will come at the cost of profitability.
In fiscal year 2021, Oracle’s gross margin was as high as 77%, but analysts surveyed by FactSet estimate it will drop to about 49% by 2030.
The cumulative negative free cash flow in the next five years will reach about $34 billion, turning positive only in 2029. Analysts believe this decline in profitability reflects the painful transition from a high-margin software business to a low-margin infrastructure business.
Eric Lynch, Managing Director of Suncoast Equity Management in Florida, said that as investors, it’s hard to feel reassured by Oracle’s plans. He said:
Four or five years is too long. That doesn’t fit our investment discipline.
The Risk of Over-Reliance on a Single Client
Lynch is also concerned about Oracle’s heavy dependence on OpenAI.
Wells Fargo analyst Michael Turrin estimates that by 2029, OpenAI may contribute over one-third of Oracle’s revenue. But OpenAI itself is burning through cash quickly and has committed over $1.4 trillion in AI development and investment. Lynch questioned:
Will OpenAI’s demand continue to exist?
Another challenge Oracle faces is improving its market recognition.
Although its clients include Meta, Uber, and Musk’s xAI, data processing giants Databricks and Snowflake do not offer services on the Oracle Cloud platform.
Databricks CEO Ali Ghodsi said in an interview:
When customers start knocking on my door and say ‘you need to run on Oracle’, that’s when we’ll do it. Maybe that point is coming, but we haven’t heard that yet.
Long-Term Believers Still Bet on the Founder
Not all investors are bearish.
Zachary Lountzis, vice president at Lountzis Asset Management, says his team has held Oracle shares since 2020 when the price was below $60. In the first quarter of this year, they added about 30,000 shares. As of September 30, the firm held Oracle shares worth $25 million.
Lountzis said:
We think $340 is indeed scary, but we are tolerant of short-term overvaluation as long as the business economics haven’t changed. Dropping from $340 to $180 is actually a very healthy correction.
He owes much of his confidence to founder Larry Ellison. According to Bloomberg data, the entrepreneur who founded Oracle in 1977 is now the world’s second-richest person. Lountzis said:
In the last 50 years, shorting Larry would have bankrupted you 40 times. He can see the future.
At the start of this month, Wells Fargo’s Turrin gave Oracle an equivalent “buy” rating and a price target of $280. He believes that if Oracle delivers on its commitment to OpenAI, industry perception may improve.
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