Oracle's Stock Drops 6% Amid Concerns Over Massive Orders

Oracle's stock price experienced a significant drop of over 6% from its historical high, following a surge in concerns over the risks associated with its massive orders. The company's remaining performance obligations (RPO) have skyrocketed to 455 billion, with a year-on-year increase of 359%. This surge is primarily attributed to a 317 billion increase in the first quarter alone. The company's CEO highlighted that the company had signed four large contracts with three different clients in the previous quarter and anticipated more similar transactions in the coming months, potentially pushing the backlog of orders beyond 500 billion.

Oracle, known for its database software, has made significant strides in the competitive cloud computing market, competing with industry giants such as Amazon, Microsoft, and Alphabet's Google in the AI computing power market. Through collaborations with companies like NVIDIA, Oracle has deployed large-scale GPU clusters in its cloud infrastructure (OCI) to provide powerful computing support for AI model training and inference.

Despite the impressive growth, analysts have raised concerns about the risks associated with Oracle's massive orders. One of the primary concerns is the high concentration of clients, with a significant portion of future growth expected to come from a single client, OpenAI. This dependency on a single client poses a substantial risk to Oracle's future revenue streams. Additionally, the profitability of AI model training-related businesses is relatively low, and there are doubts about whether Oracle has sufficient funds to invest in the massive infrastructure required to fulfill these orders.

The concerns were further fueled by a report indicating that OpenAI had signed a contract with Oracle to purchase 300 billion worth of computing services over approximately five years, starting in 2027. This contract represents nearly 95% of the new future contract revenue added in the first quarter of the fiscal year. The high concentration of orders from a single client raises concerns about the potential risks associated with relying on a single source of revenue.

Analysts have also pointed out that only a small portion of the 455 billion RPO is expected to be recognized as revenue within the next 12 months. The current orders are heavily concentrated on large contracts from AI giants like OpenAI, increasing the risk of dependency on a single client. This concentration of orders from a single client poses a significant risk to Oracle's future revenue streams.

Despite the concerns, Oracle's management remains optimistic about the company's future prospects. They have outlined a five-year revenue guidance, projecting that cloud infrastructure revenue will grow from 18 billion in 2026 to 144 billion in 2030, with a compound annual growth rate of over 50%. The company has also indicated that several billion-dollar contracts are close to being signed, suggesting that the current 455 billion RPO could continue to grow, potentially exceeding 500 billion.

However, the massive capital expenditure required to fulfill these orders poses a significant challenge. Oracle has announced that it will spend 35 billion in 2026 to build 37 new AI data centers. The high cost of acquiring the latest NVIDIA GPUs, which are in high demand globally, will put significant pressure on the company's cash flow. As a result, Oracle has removed its original target of achieving a 45% operating profit margin for the 2026 fiscal year.

The long-term nature of these contracts also introduces the risk of renegotiation. If clients like OpenAI seek to renegotiate the terms of their contracts in the future, it could have a significant impact on Oracle's profitability. Additionally, the intense competition in the AI computing power market, with tech giants like Microsoft building their own supercomputing centers, poses a threat to Oracle's market position. The potential for supply chain disruptions, particularly in the acquisition of NVIDIA GPUs, further adds to the risks faced by Oracle.

In summary, while Oracle's stock price surge reflects market optimism about the company's future prospects, there are significant risks and challenges that need to be addressed. The high concentration of orders from a single client, the massive capital expenditure required to fulfill these orders, and the potential for supply chain disruptions all pose significant risks to Oracle's future revenue streams and profitability. Investors will need to closely monitor the company's ability to continue signing new orders and the actual conversion efficiency of its capital expenditures to determine the sustainability of its growth prospects.