Oracle reports third-quarter earnings on Tuesday, and it will be an unofficial test for the artificial intelligence trade.
Following the announcement of a $50 billion financing plan at the beginning of February that included debt and equity, investors have been eager to understand the pace of dilution for current stockholders.
“The cadence matters,” said Gil Luria, equity analyst at DA Davidson, told CNBC.
Of all the hyperscalers that are leaning into AI cloud computing, Oracle has had to rely the most on financing measures to fund its ambitious data center buildout plans. Its latest debt raise included a $5 billion convertible preferred offering and roughly $25 billion in senior notes at different maturities, according to a credit investor who spoke to CNBC. The deal was oversubscribed, indicating strong demand.
Oracle’s ability to deliver data center assets to OpenAI, its main customer, is of utmost importance to investors.
Late Friday, Bloomberg reported that talks to expand its deal with OpenAI in Abilene, Texas, fell through. A source familiar with the situation told CNBC that Oracle’s deal to deliver eight sites to OpenAI remains on track and on schedule. The source asked not to be named in order to discuss a confidential matter.
OpenAI executive Sachin Katti later posted on X that while it contemplated expanding its presence in Abilene, it would look to other markets across the U.S.
“We considered expanding it further, but ultimately chose to put that additional capacity in other locations,” Katti wrote. “Today we have more than half a dozen sites under development across multiple states, including the site we’re building with Oracle in Wisconsin, where the first steel beams went up just this week.”
Katti is in charge of spearheading OpenAI’s compute infrastructure and previously held the role of AI chief and chief technology officer at Intel.
The market has become hypersensitive to any developments tied to Oracle’s $300 billion deal with OpenAI.
News of the deal initially sent Oracle’s stock up by 35% last September, its biggest intraday gain since the 1992. The deal reinforced Oracle’s position as a major contender in the AI cloud computing space, putting it alongside Amazon, Google and Microsoft.
However, in late fall, Oracle surprised the market by raising a significant amount of debt, fueling investor fears that its AI buildout would be costly and put pressure on its balance sheet. Oracle’s 5-year credit default swaps widened as bond investors were skeptical of the enterprise software company’s ability to hold on to its investment grade credit rating, currently two notches above junk. Credit default swaps are like insurance for investors, with buyers paying for protection in case the borrower can’t repay its debt. Bond investors told CNBC that they’ve become a popular way to hedge the risk tied to the AI trade.
Wall Street is looking for a clear read on the return on investment of Oracle’s AI bet when the company reports earnings Tuesday, in addition to any future capital raises.
Analysts have also speculated that the company may undergo consolidation measures to streamline costs.
TD Cowen wrote in a note to clients on Jan. 26 that “our channel checks indicate that Oracle is evaluating multiple paths forward to address financing questions including a 1) a RIF (Reduction in workforce) of 20-30K employees which could drive ~$8-10B of incremental free cash flow.”
Analysts there added that divestitures and securing vendor financing deals could also be in the cards.
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