Oracle Sinks on Report Its Cloud Margins Are Lower Than Expected

Shares of Oracle tumbled after a report revealed that the software maker’s profit margin in its cloud computing business is lower than many on Wall Street had estimated.

Oracle Sinks on Report Its Cloud Margins Are Lower Than Expected
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  • Profit Margins Are Lower Than Expected: Wall Street analysts were surprised to learn that the profit margin for Oracle's cloud computing business is lower than they had estimated.
  • Revenue vs. Profit: During the three months that ended in August, Oracle (ORCL) generated approximately $900 million in revenue from renting servers powered by Nvidia (NVDA) chips. However, the gross profit generated from that high revenue was only about $125 million.
  • Losing Money on Rentals: According to internal corporate documents, Oracle was sometimes losing "considerable" amounts of money when renting out smaller quantities of Nvidia chips, including both new and older graphics processing units (GPUs).
  • The Cost of AI: This pressure on profits is due to the heavy spending required for Oracle to acquire chips and build out necessary data center capacity.
  • Overall Margin Decline: This high spending has weighed down Oracle’s overall gross margin (a key measure of profitability). In its most recent report, the gross margin was 67.3%, which is the lowest it has been in over a year.
  • Market Reaction: When this information was reported, Oracle's shares tumbled as much as 4%.
  • High AI Demand Continues: Despite these profitability concerns, soaring demand for artificial intelligence (AI) computing has significantly boosted Oracle’s revenue growth.
  • Huge Future Projections: Because of this demand, Oracle previously projected that revenue in its cloud-computing business will jump 700% in the next three fiscal years. This forecast had sent the stock up 36% on September 10.
  • Major Deals: Oracle is heavily invested in supplying capacity, including signing a deal with ChatGPT operator OpenAI to provide 4.5 gigawatts’ worth of data center capacity. Oracle is also part of a group attempting to buy the US operations of social media platform TikTok.