Why Wall Street is unbothered by any margin weakness in Oracle’s GPU rental business
The stock has bounced all the way back.
When Advanced Micro Devices reached a megadeal with OpenAI at the start of the week, Wall Street went bananas and the shares did too, with more than 20 analysts raising their price targets in the 24 hours following the announcement.
When The Information put out a report on Tuesday saying Oracle’s GPU rental business had a fairly low profit margin, shares dipped and Wall Street responded by doing... absolutely nothing.
Not a single brokerage polled by Bloomberg has changed its rating or price target on shares of the hyperscaler in the wake of this news. And that’s seemingly for good reason: the stock has completely erased Tuesday’s drop!
Mizuho Securities called Tuesday’s tumble “a buying opportunity,” while Guggenheim added that early returns may be fairly soft, but “it’s reasonable to expect any deal to be at least 25% gross margin over its life — or Oracle wouldn’t sign it.”
While profitability challenges in the early stages of a ramp are far from uncommon, competing on price is an old hat for Oracle in particular. Back in 2017, founder, chairman, and CTO Larry Ellison detailed plans to grow its cloud business by matching Amazon Web Services’ list prices while offering speedier compute, enticing customers with the assurance that “your bill will drop by half” if they switched over. And earlier this year, the company offered very preferential pricing for government agencies.
The profitability metric reported by The Information “isn’t much of a surprise to us as the company has historically looked to undercut competitors’ pricing — as it’s done for its cloud services business,” Bloomberg Intelligence analysts Anurag Rana and Andrew Girard wrote. “We don’t expect Oracle to make changes to its pricing strategy near term as this has enabled it to capture share. Oracle can also leverage its higher-margin software and database segments to offset the pressure.”
