Oracle has warned that it will spend $15 billion more than expected next year, sending its own stock price spiraling – and that of other companies linked to the AI boom.
The admission, made during a quarterly earnings report, comes amid rising concerns about the trillions of dollars being spent to build data centers and other infrastructure to scale up and take advantage of AI. That includes a $500bn deal with OpenAI over the next five years.
Oracle's principal financial officer, Doug Kehring, revealed the cloud computing giant now has a “healthy” order backlog, aiming to calm investor concerns about rising spending.
"Backlog is at a healthy level and that we have the operational and financial strength to execute successfully," said Kehring. "While we continue to experience significant and unprecedented demand for our cloud services, we will pursue further business expansion, only when it meets our profitability requirements, and the capital is available on favorable terms."
Oracle co-CEO Clay Magouyrk echoed that idea that Oracle was picking and choosing AI contracts that benefitted its business.
"We follow a very rigorous process before accepting customer contracts," Magouyrk said. "This process ensures that we have all the necessary ingredients delivered to customer success at margins that make sense for our business."
Oracle noted that it had signed an additional $68bn in contracts over the last quarter.
Slower cloud growth at Oracle
The spending metric wasn't the only figure to cause concern. Oracle's future cloud contracts also came in less than predicted, at $523bn versus analyst estimates of $526bn.
Oracle reported $16bn in revenue for the second quarter, up 13% on year, with net income up 95% to $6.14bn, helped by the sale of Ampere.
Elsewhere, Oracle posted $8bn in cloud revenue — up by 33% and now making up half of Oracle's total revenue, analysts noted. Mike Sicilia, Oracle co-CEO, noted that it was the third consecutive quarter with double-digit growth, adding: "we see even better days ahead of us."
Cause for concern?
The markets didn't share that optimism, however. Oracle's shares were down more than 15%, with other technology stocks sliding and taking the Nasdaq to a week low.
While that suggests Oracle's spending plans have some investors alarmed, BofA Global Research analysts said the spending came as no surprise.
"The current weakness is more capex investment cycles needed to support demand, with the company paying the price for the abnormal speed in which investment is required to meet current AI demand trends," they were quoted by Reuters as saying.
Farhan Badami, eToro market analyst, added that such volatility would continue. "This will be a question of patience for investors. This AI boom won't be an overnight success, and spending in the short term is a necessity, but it will pressure margins," he said according to Reuters.
Oracle isn't the first company to raise concerns with AI spending over the last 18 months.
Microsoft, for example, reorganized its results last year to highlight its AI gains amid spending climbing by 77% to $19bn in that quarter.
But that wasn't enough to distract investors from Microsoft's heavy capex spending, which in October the company reported had climbed to $35 billion in a single quarter — and is likely to continue increasing.
As one analyst noted, that's a problem given average enterprise spend on AI is much less than expected.
“This will change but resizes the question of whether Microsoft has invested too heavily and too early in AI," said Forrester principal analyst Tracy Woo at the time.
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