(Bloomberg) — Shares of Oracle Corp. faced a significant drop following a report indicating that the profit margins from its cloud computing segment fell short of Wall Street’s expectations.
In the quarter ending August, Oracle reported approximately $900 million in revenue from server rentals utilizing Nvidia Corp. chips but only achieved around $125 million in gross profit, as highlighted by the Information based on internal documents. On Tuesday, Oracle’s stock decreased by as much as 7.1% before recovering much of the loss, while Nvidia’s shares fell by as much as 0.6%.
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The report also detailed that Oracle was incurring “substantial” losses when renting smaller volumes of Nvidia chips, affecting both newer and older models of graphics processing units. An Oracle representative chose not to provide any comments on the matter.
This year, Oracle shares have surged nearly 70%, fueled by a dramatic increase in demand for artificial intelligence capabilities which has driven the company’s revenue growth. Recently, the company forecasted a staggering 700% growth in revenue from its cloud computing services over the next three fiscal years, prompting a 36% rise in stock price on September 10.
According to Guggenheim analyst John DiFucci, while the initial gross margin contributions from cloud-computing contracts may be low, it’s probable that Oracle would not enter agreements yielding less than a 25% gross margin throughout their terms.
DiFucci asserted, “Oracle has established itself as the benchmark for AI training workloads due to its superior performance at a more competitive cost.” He also maintained his buy recommendation on the stock, stating, “The reduced cost does not indicate they are underpricing; rather, it reflects their efficiency to charge less while still securing a healthy profit.”
The extensive investments needed for chip procurement and data center expansion have impacted Oracle’s total gross margin, which does not account for operating costs. The latest earnings report revealed that Oracle’s gross margin was at 67.3%, marking the lowest figure in over a year as per Bloomberg’s compiled data.
Previously reported by Bloomberg, Oracle entered into an agreement with OpenAI to provide 4.5 gigawatts of data center capacity—enough to power millions of households across the United States. Additionally, the company is involved in a consortium of buyers nearing an arrangement to acquire the U.S. operations of the social media platform TikTok.
