Oracle’s cloud business faces lower profit margins on Nvidia chips, according to a report citing internal documents.
Why it matters: Oracle’s stock has rallied nearly 70% this year, largely driven by AI bullishness and cloud growth. However, the reported slim margins raise questions about the sustainability of Oracle’s AI investments.
The details:
- Oracle generated roughly $900 million in revenue but only $125 million in gross profit from renting Nvidia-powered cloud servers during its August-ended quarter.
- This translates to a roughly 14% gross profit margin, compared to around 70% margins for the rest of Oracle’s business.
- The internal document highlights the “financial challenge” in renting servers with Nvidia chips.
Oracle’s shares fell nearly 4% following the report, pulling back from a record high reached on Sept. 10.
What they’re saying:
- “When you first ramp up a new technology, there’s every possibility that you might not make money in the beginning, but over the life of the system, they’ll be wonderfully profitable,” said Nvidia CEO Jensen Huang.
- Guggenheim analyst John DiFucci believes it’s reasonable to expect any deal to be at least 25% gross margin over its life, or Oracle wouldn’t sign it.
The background: Oracle has seen strong demand in its cloud services, largely driven by a $300 billion computing deal with OpenAI. The company projected $144 billion in cloud infrastructure revenue by 2030.
What’s next: Oracle is hosting an analyst day next week as part of its “AI World” conference, where more details on the company’s AI strategy and financials are expected to be discussed.
