Oracle Stock Takes a Dip Despite High Growth Projections

Shares of Oracle Corporation (ORCL) experienced a nearly 7% decline on Friday, retracing the previous day’s gains amid investor concerns regarding the profitability outlook for its artificial intelligence infrastructure business. The company has been aggressively pursuing this sector, aiming to establish itself as a dominant player in the AI cloud market alongside tech giants like Alphabet, Amazon, and Microsoft. However, some analysts remain skeptical about Oracle’s ambitious targets and their achievability.

AI Infrastructure Profit Margin Projections

During a presentation to financial analysts on Thursday, Oracle announced that it expects the gross profit margin for its AI infrastructure business to reach a range of 30% to 40% by 2030. This segment involves renting out computing capacity from AI chips housed in Oracle’s data centers. The announcement followed a report by The Information a week prior, which revealed that Oracle was renting out these chips from its cloud segment, Oracle Cloud Infrastructure (OCI), at an average gross profit margin of only 16%.

Aggressive Revenue Growth Targets

Alongside the AI infrastructure target, Oracle also increased its revenue target for 2030 to $166 billion from its previously ambitious goal of $144 billion. This new objective implies a compound annual growth rate (CAGR) of 75% over five years. The news sent Oracle’s stock soaring by 3% on Thursday, driven by the expectation of rapid growth and market dominance in the AI space.

Skepticism from Wall Street Analysts

However, some analysts expressed reservations about Oracle’s ambitious targets on Friday. Jefferies analyst Brent Thill pointed out that the company’s lack of transparency regarding its capital expenditure forecasts left questions unanswered about its costs to meet customers’ expected AI demand. He stated: “Capex will need to ramp in line with OCI revenue growth, raising concerns about ORCL’s financing options to support this expansion.” The recent decision by Oracle to raise $18 billion in debt in late September also contributed to concerns about the company’s ability to finance its aggressive growth strategy.

Decelerating Growth Trajectory

JPMorgan analyst Mark Murphy, while acknowledging the impressive nature of Oracle’s revenue target for 2030, highlighted a potential issue with the growth trajectory. He pointed out that the targets showed revenue growth from new or expanded contracts decelerating towards the end of the decade. According to Murphy, net new revenue growth would soar to 150% in fiscal year 2028 but then decelerate to just 22% in 2029. Furthermore, he noted a projected decline of 27% in net new revenue for 2030.

Murphy also cautioned against the high expectations set by Oracle’s targets, stating: “Overall, we sense investors weighing the impressive financial guidance … against a feeling that it may set a very high bar with plenty of wood to chop for the next half-decade, and the poor track record of software companies collectively executing to 4-5-year-out guidance frameworks.” This suggests a level of doubt regarding Oracle’s ability to consistently deliver on its ambitious goals.

Oracle’s Position in the AI Cloud Space

Despite the recent stock decline, Oracle shares have surged nearly 75% year-to-date as the company has emerged as a major player in the rapidly expanding AI cloud market. It boasts a significant $300 billion deal with ChatGPT developer OpenAI (OPAI.PVT) as part of their US AI data center project, known as Stargate, demonstrating its commitment to staying at the forefront of this exciting new technology landscape.