Oracle suffered significant share price losses on Tuesday after it was announced that the profit margin in its cloud division is lower than expected.
According to internal company documents, the software company generated approximately $900 million in revenue from the rental of servers with Nvidia chips in the quarter ending in August. However, gross profit was only about $125 million. Oracle’s shares fell by more than 7% during the trading day before recovering some of their losses.
Nvidia also fell slightly on the news. In some cases, according to Bloomberg, Oracle may have suffered significant losses on the rental of smaller numbers of Nvidia chips, including both new and older graphics processors. The company has declined to comment on the reports.
Financial pressure on Oracle increases
The disappointing margins come at a time when Oracle is benefiting greatly from global demand for AI infrastructure. Its share price has risen by around 70% this year, thanks to growth in cloud revenue. In September, the company announced that its cloud computing revenue would increase by 700% over the next three fiscal years. Nevertheless, financial pressure on the group appears to be mounting as it becomes clear that the huge investments in infrastructure are putting pressure on margins.
According to calculations by KeyBanc Capital Markets, Oracle may need to borrow around $100 billion in the coming years to fulfill its agreement with OpenAI. The money is needed to build new data centers and infrastructure required for the $300 billion mega-contract that Oracle and OpenAI announced in September.
The deal, with a capacity of 4.5 gigawatts, is one of the largest cloud contracts ever and initially caused a sharp rise in the stock price. During the presentation of its quarterly figures, Oracle reported that total contract commitments had risen by 359 percent to $455 billion.
However, according to analysts, the company lacks sufficient resources to finance its ambitious plans entirely on its own. At the end of August, the balance sheet showed $82.2 billion in long-term debt, while $18 billion in new bonds were issued to finance the expansion of cloud capacity. The cash position was approximately $10 billion, while another $9 billion in debt will mature within twelve months.
Credit rating agencies are now warning about the rapidly rising debt and the risk that OpenAI may not be able to meet its payment obligations. The next year and a half will be crucial for Oracle to prove that the substantial investments are actually translating into profitable growth.