Shares of Oracle (ORCL 2.46%) soared earlier this year when the software and cloud company disclosed a gargantuan jump in its backlog, largely the result of a reported $300 billion AI infrastructure deal with OpenAI. However, those gains have since evaporated as investors have grown concerned about Oracle's debt and OpenAI's ability to fulfill its end of the bargain.
Oracle expects its revenue to explode from $67 billion in fiscal 2026 to $225 billion in fiscal 2030 as the company rapidly builds AI data centers and converts its backlog into revenue. Will the stock soar? Or is Oracle setting itself up for disaster?
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No room for error
What must happen for Oracle to more than triple its revenue over the next five years? For starters, OpenAI will need to raise an unprecedented amount of funding and significantly increase its revenue to have the means to pay for the Oracle deal, as well as the other deals it has struck. OpenAI has committed roughly $1.4 trillion over the next 8 years to AI infrastructure, a staggering sum.
That task becomes more difficult considering the competition OpenAI now faces. The start-up once had a clear advantage in the AI race, but that's no longer the case as Anthropic, Alphabet, and others innovate rapidly.
Oracle must also hope that the industry isn't overbuilding AI data centers. In an oversupply scenario, there's little chance that Oracle's massive investments will generate an acceptable rate of return. So many companies are plowing so much capital into AI data centers with so little visibility into what future demand will look like that overbuilding seems like the most likely scenario.
NYSE: ORCL
Key Data Points
Even if the stars align, the AI infrastructure business doesn't appear all that attractive. Oracle expects its AI infrastructure business to generate gross margins of around 35%, far below its core software business. The Information reported earlier this year that Oracle was achieving gross margins of just 14%. There's also the thorny question of how quickly data center GPUs should be depreciated.
While Oracle's forecasts are impressive, investors should be cautious.
