By Akriti Shah and Zaheer Kichwala
March 11 (Reuters) – Oracle shares rose about 12% on Wednesday after the software giant’s strong earnings forecast eased concerns about its big spending on artificial intelligence infrastructure.
While Oracle was a latecomer to the cloud industry, it quickly recognized the artificial intelligence boom, quickly building data centers full of premium processors like Meta and OpenAI for customers.
Still, the company borrowed heavily to finance data center construction, exposing it to a potential downturn in the market. In February, the company said it plans to raise up to $50 billion in debt and equity to increase capacity.
“We don’t think the funding debate will end anytime soon. But importantly, many new AI contracts are structured so customers either pay upfront or bring their own hardware, meaning Oracle can grow the promise of future revenue without the full cost,” Matt Britzman said.
Oracle’s five-year credit default swaps, a measure of how much investors charge to insure against a company’s default, were last at 150 bps, the lowest since Feb. 11.
The cost of insuring Oracle’s bonds rose to about 166 bps earlier this month, from about 40 bps a year ago, reflecting investor concerns about the company’s perceived credit risk. A key indicator of residual performance obligations (RPO), rose from $5 billion the previous year to $53 billion. The third quarter.
“Bottom line, investors still need more confidence the emerging GPUaaS business will be viable for earnings and free cash flow,” said a Morgan Stanley analyst.
The SAAS risk debate continues
Co-founder and CEO Larry Ellison brushed off some concerns about the impact of new AI coding tools, saying the technology will not undermine Oracle’s demand and that it is using the tools to develop new software products.
Concerns that fast-developing AI tools could undercut software and services in the sector sent stocks higher last month. Oracle stock is down 23% this year through its last close.
While these (Ellison) are very valid opinions, it remains to be seen whether Oracle will influence the changes in seats and prices that may occur, said Melius Research.
“We don’t think investors are really worried about the SaaS-pocalypse for Oracle, as much as the risks associated with execution, margins and funding in Oracle Cloud Infrastructure (OCI).”
