This morning, Wall Street futures open lower ๐ฝ
The reason? ๐
Again, concerns around - "the artificial intelligence bubble" ๐ญ
Oracle - which leads the construction of massive data centers for artificial intelligence - reported quarterly results yesterday. Investors reacted in panic and the stock is down about 12 percent in after-hours trading ๐ฝ
We will try to make sense of the numbers for you, filter out what's not important, and deeply analyze the concerns ๐ช
So let's start with Oracle's numbers ๐ชง
Oracle reported revenue of $16.06 billion versus a forecast of $16.21 billion, a slight miss compared to expectations, and still a nice growth of 14% compared to the previous year.
Earnings per share: $2.26, well above the forecast of $1.64, and a 54% increase compared to the previous year. โ๏ธ
Breakdown by segments ๐
Cloud revenue:
$8 billion, below the forecast of $8.04 billion, and a 34% increase compared to the previous year. โ
Software revenue: $5.88 billion, below the forecast of $6.03 billion, with a 3% decrease compared to the previous year. โ
Cloud infrastructure: $4.1 billion, below the forecast of $4.09 billion, with a 68% increase compared to the previous year โ
So far, we have an okay report, strong growth in cloud and cloud infrastructure, but many missed estimates. ๐ค
It is important to note that operating income, which was $6.72 billion, was also below the forecast of $6.82 billion. โ
The operating profit margin, which was 42%, was also below expectations of 42.2%. โ
The company is growing nicely, with almost 70% growth in cloud infrastructure, which is the company's main growth engine, and over 90% growth in net income ๐
So what is worrying the market? ๐งโโ๏ธ
Let's get to the main course ๐ฝ
RPO (remaining performance obligations): $523 billion - a 438% increase compared to the previous year, and a 15% increase compared to the previous quarter. ๐
And here the concern arises.. ๐ป
This figure tells us about the size of projects Oracle is undertaking based on commitments, not based on payments. ๐ซ
In fact, it is simultaneously building 64 next-generation data center projects, spread across many regions globally, which will be added to 147 active projects. ๐ฎ
And when a company undertakes projects on the scale of over half a trillion dollars without relying on revenue, it must take out huge loans, in fact, hundreds of billions of dollars in loans to cover development, construction, and infrastructure expenses ๐ฆ
And this is exactly what worries investors โผ๏ธ
To be precise about the concern, it is truly about the internet bubble 0.2 ๐จ
What happened in the dot-com bubble? ๐ก
Infrastructure companies took out huge loans to build next-generation infrastructure ๐ญ
They did this based on customer commitments ๐งพ
What happened in the end was that customers could not pay their commitments, which were based on calculations of huge profits from the revenue they would receive from the infrastructure, which ultimately did not materialize.. โ ๏ธ
So the customers collapsed, and consequently, the infrastructure companies, which had no way to pay their huge debts, also collapsed.. ๐
And here comes a very important remark from Oracle's management yesterday during the investor call ๐
"RPO increased by $68 billion in Q2 to $523 billion, including new long-term contracts with Meta, NVIDIA, and others." And this is very, very important to understand investors' concern. ๐
Meta, Nvidia, and the giant technology companies generate cash flow on the scale of a country; the fear that these companies will not be able to pay their commitments seems distant ๐ซด
This is not exactly similar to the dot-com bubble - where customers were small companies and startups with no revenue,
The commitments were based on future revenues that would come from that very infrastructure - and they did not materialize...๐ช
Here, we are talking about companies that are already sitting on mountains of cash never before seen in history. ๐
Oracle is increasing loans because demand is exploding, and the cost of debt is much lower than the cost of missing the AI revolution. ๐
Mike Sicilia, one of Oracle's executives, states: ๐ฌ
"The top five AI models all run on Oracle's cloud - we have a significant advantage over competitors in applications." Clay Magouyrk added: ๐ค
"Our multi-cloud database business grew at a rate of 817% in Q2, the fastest growth.
That is, the leading models of Meta, Nvidia, Google, XAI, and also OpenAI - all run on Oracle's data centers.. ๐ฅ
Uber also uses over 3 million Oracle OCI cores. ๐
TEMU uses over a million cores ๐จ๐ณ
And this morning, Bloomberg reports that following the report, Oracle's credit risk, which is already high - is expected to rise further... โ
The big question is, is this a material risk โ
We will be here to follow up and update ๐