Oracle’s shares surged a staggering 36 per cent on Wednesday night, sparking both excitement and scepticism among market observers. Former JPMorgan strategist Marko Kolanovic quipped at the $US212 billion surge in Oracle’s market capitalisation, pointing out it exceeded the value of most companies in the S&P 500, including Disney. The surge followed the release of Oracle’s first-quarter numbers and bullish projections for its cloud infrastructure business, forecasting revenue growth from $US18 billion in 2026 to $US144 billion in 2029. Oracle is a multinational computer technology corporation known for its database software and cloud systems. The company provides services in cloud engineering, computing, and software.
Driving the optimism is a new deal with OpenAI, where Oracle will provide $US300 billion in computing power over five years. This explains the $US317 billion increase in contracted revenue, bringing total forward contract bookings to $US455 billion. However, concerns linger about the concentration of demand from a small group of customers, particularly OpenAI, which, despite its $US500 billion valuation and rapid revenue growth, remains unprofitable. This raises questions about the sustainability of the current AI investment boom, dependent on continuous capital injections and the promise of future gains.
Analysts are also pointing out that Oracle buys chips from Nvidia to build its cloud infrastructure, and then rents the cloud infrastructure back to Nvidia and other players such as OpenAI. This creates a circular flow of money, where large hyperscalers drive capital expenditure, turbocharging revenue for chipmakers like Nvidia and language model providers like OpenAI. Nick Ferres, chief investment officer at Vantage Point Asset Management, draws parallels to the dotcom boom, noting that Oracle’s shares have risen about 200 per cent in the past four years, while earnings have decreased.
Doubts persist about free cashflow generation and single-digit profit margins in Oracle’s cloud infrastructure business. The AI boom remains highly speculative, with significant risks if the investment boom falters or competition intensifies. The question remains whether this surge marks the next stage of the AI revolution or the peak of an unsustainable bubble. Investors must weigh the potential for continued gains against the inherent risks in this rapidly evolving landscape.
