Oracle's stock price experienced a significant decline, falling nearly 7% even after the company presented a highly optimistic long-term financial forecast to analysts. During a detailed briefing, executives raised revenue projections through 2030 and addressed concerns about the profitability of its rapidly growing artificial intelligence cloud business, creating a disconnect between the company's outlook and the market's immediate reaction.
Key Takeaways
- Oracle shares dropped 6.8% in the trading session following its analyst day presentation.
- The company significantly increased its 2030 revenue forecast to $225 billion, a substantial upgrade from previous targets.
- Management clarified that its AI cloud server business has a 35% gross margin over the life of a contract, countering a recent report that suggested a much lower 14% margin.
- A major component of Oracle's future growth is a $300 billion multiyear cloud contract with OpenAI, which presents both a massive opportunity and significant execution challenges.
Addressing Profitability Concerns
A key focus of the analyst meeting was the profitability of Oracle Cloud Infrastructure (OCI), the company's AI server rental division. Investor concern had grown following a media report from The Information which stated the business operated on a surprisingly low 14% gross profit margin.
During the presentation, Oracle management directly addressed this figure. They explained that the low margin was a temporary result of the rapid upfront investment in data center expansion. These costs are incurred before customer contracts become active and revenue is recognized.
"The company modeled its long-term outlook as pursuing customers based on profit potential, while staying focused on cost discipline, and utilizing a variety of financing options for growth," analysts at KeyBanc Capital Markets noted.
To provide a clearer picture, Oracle presented a slide indicating that the actual gross margin for these AI contracts is 35% when measured across the entire contract lifecycle. This clarification initially boosted investor confidence, causing the stock to rise nearly 3% during that part of the presentation.
Profit Margin Comparison
For context, CoreWeave, a competitor in the AI cloud provider space that is also expanding quickly, reported a 51% gross profit margin in its most recent quarter. Oracle's 35% lifecycle margin positions it differently within the competitive landscape.
Upgraded Financial Forecasts
Despite the subsequent stock drop, the financial targets presented by Oracle were notably strong. The company issued a significant upgrade to its long-term outlook compared to the projections shared at its 2024 analyst meeting.
Management now expects total company revenue to reach $225 billion in 2030. This includes a target of $185 billion in 2029, a large increase from the $104 billion previously projected for that year.
OCI Growth Projections
The forecast for the Oracle Cloud Infrastructure division was also revised upward. The company raised its projected 2030 revenue for OCI from $144 billion to $166 billion. This new target implies a compound annual growth rate of approximately 75% from its expected $10 billion in fiscal 2025.
According to the new guidance, both overall company revenue and earnings per share are now projected to grow at an annual rate of around 30% through the end of the decade.
The OpenAI Contract
Underpinning these ambitious projections is Oracle's massive backlog of contracted work, which now exceeds half a trillion dollars. However, a significant portion of this backlog, reportedly $300 billion, is tied to a single multiyear cloud contract with AI leader OpenAI. This concentration creates both opportunity and risk, as its fulfillment depends on OpenAI's ability to secure funding and Oracle's capacity to finance and power the required data center expansion.
Market Reaction and Analyst Views
The positive news on margins and the strong long-term forecast did not prevent a sharp reversal in Oracle's stock. After closing up 3.1% on the day of the briefing, the shares began to slide in after-hours trading as CFO Doug Kehring detailed the company-wide targets. The selloff intensified the following day, with shares falling 6.8%.
The reason for the market's negative response to what appeared to be good news remains unclear. It may reflect investor skepticism about the company's ability to execute on such large-scale contracts or concerns about the capital expenditure required to achieve its goals.
Despite the stock's slump, financial analysts who attended the event remained largely positive. Many viewed the long-term plan as robust and achievable.
- KeyBanc Capital Markets reiterated their "Overweight" rating and a $350 price target on the stock.
- Melius Research was even more optimistic, raising its price target to $400 with a "Buy" rating.
Ben Reitzes of Melius Research wrote, "Demand for AI workload capacity has reached unprecedented levels due to massive inferencing growth from reasoning models. Oracle is emerging as a major beneficiary."
The divergence between the bullish analyst commentary and the negative market sentiment highlights the ongoing uncertainty surrounding Oracle's large-scale pivot to AI infrastructure. While the company has laid out an ambitious roadmap for growth, investors appear to be weighing the potential rewards against the significant execution risks.
