Oracle's strategic pivot towards Artificial Intelligence has created an unprecedented dependence on OpenAI, a relationship that now appears to be the root of the company's current difficulties. After five decades of cultivating a vast enterprise client base, Oracle finds its future more intricately tied to a single partner than ever before.
This significant shift materialized following Oracle's agreement to provide OpenAI with $300 billion in AI-computing services. This deal, alongside other substantial agreements OpenAI secured, is particularly notable given OpenAI's annual revenue, which is less than $20 billion. The implications of this partnership have permeated every facet of Larry Ellison's business, with its performance now being scrutinized through the lens of this singular relationship.
The pressure on Oracle intensified last month with Google's launch of Gemini 3. This new model's superior performance compared to the latest version of ChatGPT prompted OpenAI leadership to declare a "code red" situation. As OpenAI operates as a private entity, its investors' concerns have manifested in a sell-off of shares in companies perceived to be most exposed to it. Oracle has been a significant casualty of this trend, experiencing a 32% stock decline in the three months leading up to its fiscal second-quarter report. This performance ranked as the third-worst on the S&P 500, occurring at a time when Oracle was approaching a $1 trillion valuation, driven by expectations that AI demand would double its market capitalization.
Oracle Absorbs Rising Costs as Capital Expenditures Explode
In its most recent quarter, Oracle reported 14% year-over-year revenue growth, marking its strongest rate in nearly three years. However, this figure fell slightly short of Wall Street's expectations. The company also expanded its revenue backlog by approximately $68 billion through new agreements with Meta and Nvidia, although these deals had already been acknowledged during an October analyst meeting. The primary surprise emerged from Oracle's expenditure. The company disclosed a record $12 billion in capital expenditures for the quarter ending in November, significantly exceeding the $8.4 billion anticipated by analysts.
Oracle subsequently raised its full-year capital expenditure forecast from $35 billion to $50 billion, a revision that led to an additional 12% drop in its stock price during after-hours trading. A capital expenditure budget of this magnitude represents 75% of Oracle's projected revenue for the year, a stark contrast to the company's average of about 17% over the past five years. For comparative context, Meta is expected to allocate roughly 36% of its revenue to capital expenditures this year. These figures underscore the substantial strain Oracle is enduring as it endeavors to serve OpenAI's demands while simultaneously catering to its existing cloud clientele.
Oracle Carries Massive Obligations Tied to OpenAI
Oracle's escalating spending is directly linked to more than just data-center expansion; it is intrinsically tied to its substantial obligations with OpenAI. OpenAI accounts for the majority of Oracle's $523 billion in remaining performance obligations. These obligations represent contracted revenue that has not yet been recognized. The total figure is nearly nine times the size of Oracle's annual revenue, a ratio significantly higher than those of its cloud rivals. For instance, Microsoft, a primary computing partner for OpenAI, maintains a backlog that is only about 1.4 times its revenue over the past four quarters.
Oracle's future growth trajectory is heavily contingent on OpenAI's ability to fulfill these commitments. However, the immense scale of these deals limits Oracle's options for diversification. The stability of these obligations is also subject to fluctuations in AI demand and the competitive landscape, particularly the progress of rivals like Google and Anthropic in closing the gap with OpenAI.
Gil Luria of D.A. Davidson commented that Oracle needed to use its quarterly report "to address concerns about the tricky balance of borrowing money to build out capacity for OpenAI, with the new understanding there is very low likelihood OpenAI will live up to its obligations." Oracle failed to provide this crucial clarity. Over the last four quarters, the company has depleted over $13 billion in cash and currently holds approximately $88 billion in net debt.
This financial position stands in stark contrast to its rivals, many of whom maintain substantial net-cash reserves. Moody's recently noted that "Oracle has the highest exposure to OpenAI and has the weakest credit metrics among investment-grade hyperscalers." Despite these concerns, Oracle stated on Wednesday its intention to safeguard its investment-grade rating while financing its AI expansion. Nevertheless, investors are exhibiting clear signs of frustration as the financial pressures continue to mount.