An Inconvenient Piece of News

It was a good thing that I procrastinated in starting today’s piece.  I was struggling to find a hook when I noticed that Oracle (ORCL) was plunging by -7%.  Well-followed stocks usually need a reason for a rapid change in sentiment, so I immediately looked for the reason.  An article in The Information, entitled “Internal Oracle Data Show Financial Challenge of Renting Out Nvidia Chips” was the trigger.

The article states that ORCL generated about $900 million revenue from renting servers powered by Nvidia (NVDA) chips, which recorded a gross profit of $125 million.  That would imply a gross margin of about 14%, which likely excludes another 7% of additional depreciation.  That figure is well below those of other ORCL product lines and competitors like Amazon Web Services (AMZN) and Google Cloud (GOOG, GOOGL).  It is understandable why we would see a quick drop in ORCL, especially after the huge run-up that we saw after the company’s last earnings report.

Since then, ORCL has been giving back a significant portion of those immediate heady gains, though it remains about 15% above its pre-earnings level.  Some of the pullback seemed inevitable after such a dramatic move, and some of it could be related to questions about the ultimate profitability and sustainability of the deal with OpenAI that fueled the initial pop.  (We have been raising questions about that for a few weeks).  Interestingly, ORCL was flirting with its 30-day moving average just prior to its earnings, and it has reverted back to that level today.

ORCL 2-Months, Daily Candles with 30-Day Moving Average

Source: Interactive Brokers – Past performance is not indicative of future results.

Considering the importance of NVDA, server rentals, and cloud services to the entire AI-fueled ecosystem that has been the linchpin of the current bull market, it is not surprising that other key stocks are off their highs.  As I type this, NVDA and AMZN are essentially unchanged after giving back early gains, while GOOGL, Microsoft (MSFT), and Coreweave (CRWV) are modestly lower.  AMD, meanwhile, continues higher after its own OpenAI rocket ride yesterday.

We can’t yet classify today’s drop as a significant turning point for the market – not with the S&P 500 (SPX) down about -0.5% after 7 straight days of gains.  But the ORCL story might represent another data point that causes some skepticism about the lofty expectations surrounding artificial intelligence.  Money is still being made, and chips are still being bought, but if the rush to build capacity causes corporate margins to compress, that could cause investors to rethink some of the relentless growth that is baked into many of their assumptions.  That could get messy.