Oracle’s earnings unlikely to get the giddy reaction they did last time

It’s probably not going to be like last time.

Back in September, when Oracle reported that its AI-related sales backlog had more than quadrupled to $455 billion — largely due to deals with OpenAI — the stock exploded, rising more than 20%, creating billions in wealth within minutes. The celebration lasted into the next day, when Oracle had its best session since 1992.

Somewhere in that crowded hour, Oracle’s cofounder and chairman briefly became the world’s richest person, temporarily overtaking Tesla CEO Elon Musk.

But that was then.

In the intervening three months, Oracle shares have lost all of their OpenAI-related value — and more — in a roughly $300 billion incineration of shareholder wealth. Effectively, the market is now valuing the same giant backlog of AI-related deals it cheered wildly back in September as a slight negative for the company today.

Of course, other giant tech companies closely tied to AI — for instance, Microsoft — have experienced ups and down over that period as well.

But the half-trillion-dollar round-trip journey for Oracle underscores how the AI investment boom has transformed the company from a cash-spewing (but dull as dishwater) vendor of cloud services and corporate software into a barometer of investor sentiment at the epicenter of AI — just as the market’s mood has shifted from giddy optimism to show-me skepticism.

For the record, Wall Street is expecting Oracle’s top- and bottom-line results for its fiscal second quarter to be quite strong, with sales predicted to rise 15.2% to $16.19 billion. Adjusted earnings per share are expected to jump 11.6% to $1.64, near the top of previously issued guidance of between $1.61 and $1.65. Guidance on Q3 numbers is likewise supposed to be healthy, according to consensus estimates compiled by FactSet.

“Investors are looking for more than that,” says Mark Moerdler, an analyst covering Oracle for Bernstein Research in New York, saying that investors have gone from excitement over Oracle’s exposure to AI growth to worries about “implications of all of this business and whether it is a good, healthy business.”

At current course and speed, Oracle plans to boost its capex investments in servers, networking equipment, and the semiconductors needed for data centers, which will transform its business into a cash-consuming monster.

Forecasts call for the business to burn roughly $17 billion a year by 2027, even as profits are expected to surge. This is part of the reason why doubts about Oracle’s ability to pay its debts have been creeping into the bond market.

“The Street wants clarity on the whole issue of capex and free cash flow,” Moerdler said, adding that any comfort Oracle can give investors that capex expenditures could be curtailed, perhaps by plans to rent or lease data center equipment from vendors rather than buying it up front, would be a positive for the stock.

The other key issue facing Oracle, however, is its tight entanglement with OpenAI.

“The Street doesn’t know at this moment in time how to gauge how successful OpenAI will be,” Moerdler said, noting how concerns about the competitive position of the company have grown since the introduction of Alphabet’s latest Gemini model, which has been widely praised and seems to be quickly closing the gap with OpenAI’s ChatGPT.

Not to put too fine a point on it, but that could become a big problem for Oracle over time. OpenAI has signed deals to pay Oracle some $300 billion for cloud computing capacity that Oracle is right now borrowing and investing to build.

If OpenAI fails, or can’t come up with the cash for those payments when the time comes, Oracle could be left holding the bag, a nightmare scenario for investors.

Such concerns about OpenAI, as well as the outlook for capex spending to crater cash flows, are big parts of why Oracle shares have slumped so sharply over the last few months, Moerdler says.

“To really have the stock come back, they need to start to clarify some of these concerns,” he said.