Shares of enterprise software company Oracle experienced a notable decline on Tuesday following reports that the gross profit margin from its rapidly growing artificial intelligence cloud business is significantly lower than investors anticipated. The news raised questions about the long-term profitability of a key growth area for the company, leading to a sell-off in the market.
Key Takeaways
- Oracle's stock (ORCL) dropped nearly 4% after reports surfaced about low profit margins in its AI cloud division.
- The AI server rental business reportedly generated a gross profit margin of only 14% in the recent quarter.
- This is substantially lower than Oracle's overall gross margin, which has historically been near 70%.
- Reports also indicate a loss of nearly $100 million from renting out Nvidia's latest Blackwell chips.
- The disclosure casts a shadow on the profitability of Oracle's major cloud deal with AI leader OpenAI.
AI Profit Margin Report Triggers Sell-Off
Oracle's stock price fell by nearly 4% to approximately $280 per share during midday trading on Tuesday. The decline was a direct reaction to a report from The Information, which detailed the financial performance of Oracle's AI cloud infrastructure services.
According to the report, Oracle generated about $900 million in revenue during its most recent quarter from renting out its servers equipped with Nvidia's powerful AI chips. However, the gross profit from these activities was reportedly only around $125 million.
This calculation results in a gross profit margin of approximately 14% for the AI cloud segment. This figure surprised Wall Street, as it stands in stark contrast to the company's much higher historical margins.
Understanding Gross Profit Margin
Gross profit margin is a critical financial metric that measures a company's profitability. It is calculated by subtracting the cost of goods sold from revenue and dividing by revenue. A higher margin indicates greater efficiency and profitability from core business operations, before accounting for operating expenses, interest, and taxes.
A Stark Contrast to Overall Company Performance
The reported 14% margin for the AI cloud business is a significant departure from Oracle's broader financial profile. Data from TipRanks shows that the company's gross profit margin over the last 12 months was 69.66%.
Furthermore, recent data points to a potential trend of margin compression. According to calculations by Bloomberg, Oracle's overall gross profit margin in its first-quarter 2026 results was 67.3%, marking its lowest level in over a year.
The low profitability in the high-growth AI sector is a primary concern for investors who have been betting on this division to drive future earnings. The report also alleged that Oracle incurred a loss of nearly $100 million in the same quarter from its initial efforts to rent out servers powered by Nvidia's newest and most advanced Blackwell chips.
The OpenAI Partnership
Oracle's push into AI infrastructure gained significant momentum following a landmark cloud computing deal with OpenAI, reportedly valued at up to $300 billion. The announcement of this partnership previously sent Oracle's stock soaring, delivering its largest single-day rally since 1999 with a gain of as much as 40%. The new margin data now forces a re-evaluation of the financial benefits of such large-scale AI deals.
Investor Concerns and Future Outlook
The low margin figures have fueled concerns among analysts about Oracle's reliance on its partnership with OpenAI. While the deal provides a massive revenue stream, the newly revealed profitability metrics suggest the cost of building and maintaining the necessary infrastructure is higher than previously understood.
This situation raises critical questions about the company's strategy and whether it can scale its AI operations profitably. The high capital expenditure required to acquire and operate cutting-edge hardware from partners like Nvidia appears to be weighing heavily on the segment's financial returns.
Investors are now closely watching to see if Oracle can improve efficiency and command higher prices for its AI cloud services to boost margins to levels more consistent with its traditional software business.
Wall Street Analyst Consensus
Despite the recent concerns, the overall sentiment from Wall Street analysts remains cautiously optimistic. Based on the opinions of 34 analysts compiled over the past three months, Oracle stock holds a "Moderate Buy" consensus rating.
"The long-term potential of AI is undeniable, but the immediate path to profitability for infrastructure providers is proving to be capital-intensive. Oracle's challenge will be to balance revenue growth with margin improvement," noted a market analyst not directly involved with the ratings.
The analyst ratings are broken down as follows:
- 25 Buy ratings
- 8 Hold ratings
- 1 Sell rating
The average 12-month price target for ORCL stock is $341.47. This target suggests a potential upside of approximately 22% from its current trading price, indicating that many analysts believe the company can navigate its current challenges and that the stock is undervalued following the recent drop.
