Script
Look at this graph. This isn’t a cryptocurrency or a memestock. It’s Oracle, an American tech firm, that surged over 40% in a day. Why did this happen? And more importantly is this real growth, or just a repeat of the dotcom bubble?
Oracle’s attraction to investors is because of artificial intelligence. It’s selling AI training datacentres to firms like OpenAI. It hasn’t been paid yet, but has secured over $450bn in future contracts, which caused the stock price to shoot up. This resulted in owner Larry Ellison briefly becoming the richest man in the world. As tech firms rush for the smartest AI model, there’s large demand for AI datacentres which are used for training. By undercutting rivals, Oracle has earned new contracts, preparing to ride the wave of AI-fueled growth. The tech firm already provides database software and cloud computing infrastructure, earning a steady revenue.
The majority of Oracle’s stock increase, however, comes from future AI datacentre contracts – $300bn of which is from OpenAI alone. But as the FT points out, OpenAI does not have $300bn. The firm only has 10bn in annual revenue, yet the Oracle contract will cost 30bn a year, starting in 2027. So much of Oracle’s value rests on OpenAI growing, and being able to afford future contracts.
Even if this happens, scaling its datacentres to the required level may be challenging for Oracle. These projects need huge capital investment for the expensive graphics cards used inside them. This will require borrowing, while the firm already has a significant debt burden. This investment will depreciate rapidly, as the constant release of faster graphics cards quickly renders even recently-built data centres uncompetitive.
Nevertheless, the investment will pay off if the AI contracts are fulfilled. But the firm already has a reputation for missing earnings expectations. In the same report that caused the huge stock price increase, current profits fell short of forecasts.
With a market value 40 times its net assets, investors are betting on Oracle’s ability to ride AI driven growth. This relies on resource intensive models like Large Language Models continuing to need Oracle’s datacentres. But cheaper, less resource intensive Small Language Models are rising in popularity. And DeepSeek’s LLM success on limited training may suggest efficiency, rather than brute force, is the path to smarter AI models. If that happens, today’s data centre shortage could flip to an oversupply, leaving Oracle burdened with rapidly depreciating assets and the massive debt taken on to build them.
Despite all the risks, Oracle’s stock price rally suggests investors are hopeful for the company’s AI driven future. The strategy has been compared to selling shovels in a gold rush. But the shovels haven’t been sold, they’ve just been ordered. And if the AI gold rush fails – or simply finds a cheaper way to dig – Oracle will be left with billions in unwanted datacentres, already on their way to becoming obsolete.
References
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Media References
Creative Commons Photos
https://www.flickr.com/photos/oracle_images/15382647876
https://www.flickr.com/photos/oracle_images/8043804372
https://www.flickr.com/photos/e2conf/6351197459/
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