Oracle's spending spree

Today, Time announced that the "architects of AI” are its Person of the Year. But AI investors aren’t feeling like they have much to celebrate as fears of a bubble reach (another) fever pitch.

It’s all thanks to Oracle, which sank 10.82% today after spooking investors about its AI spending spree. The stock is now down roughly 40% from its high in September.

The company reported revenue of $16.06 billion for its fiscal second quarter yesterday, up 14% from the year prior but below forecasts of $16.21 billion. Meanwhile, its adjusted earnings per share came in at $2.26, above expectations—though the beat was primarily thanks to the sale of its chip company Ampere to SoftBank.

But what really concerned investors was its AI budget, and the debt the company is using to make all its spending possible.

Oracle is looking to transition from a legacy software company to a predominantly AI cloud company, and is on a spending spree as it builds data centers. Oracle reported capital expenditures of $12 billion in Q2, up from $4 billion in the same quarter last year, and far above the $8 billion expected by analysts.

There’s no sign of a slowdown: Oracle also raised its capex guidance, and projects it will spend $50 billion during the full year, up from its previous $35 billion estimate. And the amount it’s borrowing to fund all this is concerning investors: In September, the company raised $18 billion in a bond sale, one of the largest ever in the tech industry.

Zoom out: Investors celebrated Oracle’s Q1 report earlier this fall after the company reported a massive 359% increase in its backlog thanks to deals with a who’s who of AI companies, including OpenAI, xAI, Meta, and Nvidia.

Now, those same deals are being heavily scrutinized. Investors are worried that the company is relying too heavily on OpenAI, which still accounts for the majority of its revenue backlog, given the $300 billion deal the two companies recently inked.

And OpenAI isn’t exactly having the best month after Google’s Gemini ate its lunch. But since OpenAI is privately held, investors have instead been punishing the public tech firms linked to the AI startup—like Oracle.

Is the bubble starting to burst?

Oracle is on track for its worst day since January today, and brought the tech sector down with it: Nvidia sank 1.55%, Broadcom fell 1.6%, and Hewlett Packard Enterprise lost 2.81%.

Since Oracle is viewed as a kind of bellwether for the AI boom at large, today’s miss seemed to confirm the fears that have been circulating for months—that all of this AI spending isn’t actually going to pay off.

Big Tech isn’t blinking yet: Microsoft, Amazon, Meta, and Alphabet expect to spend a combined $350 billion this year alone. Oracle’s not spending that kind of money, but as its tab keeps growing, investors keep worrying that the bill will come due for the entire AI trade sooner rather than later.—LB