Oracle shares rally 12% as strong revenue forecast eases concerns over massive AI bets

Oracle shares surged about 12% in early trading on Wednesday after the software giant's upbeat revenue forecast eased concerns over its hefty spending on artificial intelligence infrastructure.

While Oracle was a latecomer to the cloud industry, it swiftly recognized the artificial intelligence boom, rapidly building out data centers filled with premium processors for customers such as Meta and OpenAI.

Still, the ‌firm has borrowed ⁠heavily to ⁠fund the data center build-outs, heavily exposing it to any potential downturn in the market. In February, the company said it planned to raise up to $50 billion in debt and equity to build capacity.


"We don't think the debates around financing are going away anytime soon. But importantly, many of the new AI contracts are structured so customers either pay upfront or bring their own hardware, which means Oracle can grow future revenue commitments without taking on the full cost itself," ⁠said Matt ‌Britzman, senior equity analyst at Hargreaves Lansdown.

Oracle's five-year credit default swaps, a gauge of how much investors charge to insure against the company's default, were at about 155 ⁠basis points early on Wednesday.

The cost of insuring Oracle's bonds has soared to record highs of around 166 bps earlier this month, from roughly 40 bps a year ago, reflecting investor concern about the company's perceived credit risk.

Remaining performance obligations (RPO), a key indicator of future contracted revenue, jumped 325% from a year earlier to $553 billion in the third quarter.

"Bottom line, investors still need greater confidence the emerging GPUaaS business will be accretive to earnings and free cash flow," said Morgan Stanley analysts.

SAAS RISK DEBATE CONTINUES

Co-founder and executive ‌chairman Larry Ellison allayed some concerns about the impact of new AI coding tools, saying the technology would not weaken demand for Oracle and it is using these tools to create new software products.

Worries that ⁠fast-advancing AI tools could upend software and services pummeled stocks in the sector last month. Oracle's stock is down 23% this year through its last close.

While these (Ellison) are very credible comments, it remains to be seen if Oracle sees an impact on seats and pricing shifts that could occur, said Melius Research.

"We don't think investors are really concerned about the SaaS-pocalypse for Oracle, as much as the risks associated with execution, margins and financing within Oracle Cloud Infrastructure (OCI)."

Oracle's stock is trading at over 19.17 times its 12-month forward earnings estimates, compared with Microsoft's 22.05.