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It’s too soon to be talking about the Curse of OpenAI, but we’re going to anyway.
Since September 10, when Oracle announced a $300bn deal with the chatbot maker, its stock has shed $374bn in market value:
OK, yes, market caps don’t work like that and the post headline is clickbait. But equivalents to Oracle shares are little changed over the same period (Nasdaq Composite, Microsoft, Dow Jones US Software Index), so neither is it entirely wrong. Oracle’s “astonishing quarter” really has cost it as much as one Dell, or two eBays.
Investor unease stems from Big Red betting a debt-financed data farm on OpenAI, as MainFT reported last week. We’ve nothing much to add to that report other than the below charts showing how much Oracle has, in effect, become OpenAI’s US public market proxy:
The theory goes that OpenAI is in a rush to define discover AGI, and Oracle is uniquely able to scale the compute capacity it needs. Oracle promises the lowest upfront costs and fastest path to income generation among the hyperscalers because it’s a data centre tenant rather than the landlord.
Alternatively, Oracle doesn’t have as much operating profit to burn as its competitors, so is throwing everything it can at supporting its one big customer in exchange for an IOU:
At an analyst day last month in Las Vegas, Oracle said it was aiming for cloud computing revenue of $166bn by 2030:
To get there, Oracle’s capex budget for the current financial year ending May is $35bn. The consensus has annual capex levelling out at around $80bn a year in 2029, after which revenues continue to ramp:
And from 2027, the majority of revenue would be coming from OpenAI:
But Oracle’s net debt is already at 2.5 times ebitda, having more than doubled since 2021, and it’s expected to nearly double again by 2030. Cash flow is forecast to remain negative for five straight years:
So while the OpenAI agreement has been more than written off the equity, the risk of unfunded expansion remains and the cost of hedging Oracle debt is at a three-year high.
We need to add the usual warnings: Credit-default-swap liquidity isn’t great; the increased demand for Oracle CDS comes after $18bn of bond sales in September; a CDS premium in the low 100 basis points isn’t that exciting; and some firms taking the other side of the trade are no mugs. Still, pointy.
Beyond the charts, a broader question relates to whether an OpenAI deal is still worth announcing.
A few months ago, any kind of agreement with OpenAI could make a share price go up. OpenAI did very nicely out of its power to reflect glory, most notably in October when it took AMD warrants as part of a chip deal that bumped share price by 24 per cent.
But Oracle is not the only laggard. Broadcom and Amazon are both down following OpenAI deal news, while Nvidia’s barely changed since its investment agreement in September. Without a share price lift, what’s the point? A combined trillion dollars of AI capex might look like commitment, but investment fashions are fickle.
Further reading:
— Oracle’s astonishing jam-tomorrow OpenAI trade (FTAV)
Read the full article here
