The recent partnership between Oracle and OpenAI has sparked significant discussion regarding the implications and risks of their relationship. Following the announcement of a monumental $300 billion deal on September 10, Oracle’s stock has experienced a staggering decline, shedding $315 billion in market value. While some may argue that focusing solely on market capitalization offers an overly simplistic view, the reality remains that Oracle’s shares have faced a notable downturn in contrast to its competitors like Nasdaq Composite and Microsoft.
Investor sentiment appears to be shaken as Oracle has invested heavily in what could be seen as a debt-financed bet on OpenAI. This concern was highlighted in a report by MainFT, indicating that Oracle’s financial commitments are heavily tied to the success of OpenAI, essentially making it a proxy for the chatbot maker in the U.S. public market.
Oracle’s urgency to support OpenAI stems from its ambition to explore artificial general intelligence (AGI), and the tech giant believes it possesses the necessary infrastructure to support this quest. Promising minimal upfront costs and rapid potential income, Oracle is betting on its ability to provide the scale of compute capacity that OpenAI requires.
In a recent analyst briefing, Oracle projected its cloud computing revenues could reach a substantial $166 billion by 2030, which would require a capital expenditure budget of $35 billion for the current financial year. This figure could scale to about $80 billion annually by 2029, with a significant portion of the revenue expected to stem from OpenAI’s operations. However, Oracle’s mounting net debt, currently at 2.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA), presents a precarious situation, as cash flow is anticipated to remain negative for the next five years.
The market is cautiously assessing the ramifications of Oracle’s investments, with rising costs of insuring against defaults on its debt reaching a three-year high. Despite the traditional allure of partnerships with OpenAI leading to stock price boosts, the current market climate shows a decline in shares for not just Oracle but other tech giants such as Broadcom and Amazon following similar announcements.
As the tech sector navigates the often fickle waters of investment trends, the sustainability of Oracle’s strategy and its financial health will remain under scrutiny. The question lingers: does aligning with OpenAI still hold the same weight as it once did, particularly in an environment where enthusiasm for new investments can change rapidly? Oracle’s journey with OpenAI is a compelling case study on the risks and rewards of being deeply intertwined with a leading AI pioneer in an ever-evolving market landscape.