Oracle's cloud AI deals excite investors, but do they have long-term potential?

By Therese Poletti

Deals with rivals Microsoft, Google might be more of a short-term boost

Investors mostly ignored software giant Oracle Corp.'s earnings miss for its fiscal fourth quarter Tuesday, and focused instead on news of its AI-fueled cloud deals with longtime rivals Microsoft Corp. and Google Cloud.

Oracle (ORCL) co-founder and Chief Technology Officer Larry Ellison even touted a future of interconnected clouds, where rival cloud-computing services would share data-center capacity, much as the company is currently doing with Microsoft and its Azure service.

Also read: Oracle's stock soars as upbeat guidance, Google deal, outweigh earnings miss.

"It's very important, we think, that all the clouds become interconnected, so we're thrilled to have the connection with Microsoft and be building OCI [Oracle Cloud Infrastructure] data centers inside, right inside of Azure, so the computers are next to each other to minimize net work costs and network latency which is all good things," Ellison said told analysts on the company's call. "We're doing the same thing with Google. We would love to do the same thing with AWS," referring to Amazon.com Inc.'s (AMZN) Amazon Web Services.

In addition, Oracle said it has signed over 30 sales contracts for AI data centers totaling more than $12.5 billion - including one with OpenAI to train ChatGPT in the Oracle Cloud. Oracle said it is building a data center for OpenAI, which is included in its forecast for capital spending to "probably be double" in fiscal 2025.

But some analysts are skeptical about the longevity of these partnerships. Brent Thill, a Jefferies analyst, said he believed that they were opportunistic moves by Microsoft (MSFT) and Alphabet's (GOOG) (GOOGL) Google, and that demand for Microsoft's Azure is exceeding its capacity.

"We do not believe these AI demand-driven partnerships will last forever given Microsoft and Google want to gain share of Oracle's on-prem private data [business]," Thill wrote in a note to clients. "We glean from Microsoft/OpenAI's deal to train ChatGPT on OCI as yet another data point that demand for Microsoft's AI services continues to exceed its capacity."

The Oracle servers are running Oracle's database software within Google Cloud Services and Microsoft Azure. It is likely that Oracle's database software runs best on its own, Oracle-designed servers. In addition, the latency, or slowdown, in connection speeds is reduced being inside the Google and Azure data centers. Ellison also talked about Oracle's "unbelievably fast networks" that are part of its data centers.

Ellison said that the demand was driven by the faster speeds at its data centers, their lower cost and their autonomous nature. "Almost all cloud-security breaches begin with human error. Eliminating the possibility of human error is the only way to make certain your cloud data is not stolen," he said. Oracle's clouds can range in size from as small as a cloud for a submarine to a massive data center it is building where it could park eight 747 airplanes, nose to tail.

While Oracle is seeing a big boost in its cloud business, it is taking time for that growth to filter into its overall revenue, while its legacy software-licensing revenue declines. In the fiscal fourth quarter, total revenue grew 3%, while Oracle's Cloud Infrastructure business grew 42%.

Chief Executive Safra Catz forecast fiscal first-quarter 2025 revenue would grow about 5% to 7% overall, while total cloud revenue will grow about 20% to 22%. Cloud infrastructure is projected to grow more than 50%.

Investors who are hoping for continued growth in Oracle's cloud business should expect that to continue. But that growth shouldn't overshadow the impact of Oracle's legacy software-licensing business, as it did this quarter. When looking at Oracle, remember it has other, slower businesses, and it's also not yet clear whether the new cloud deals with its rivals can last for the long haul.

-Therese Poletti

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06-11-24 2203ET

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