Oracle stock slips 5% on report company is seeing thin cloud margins from Nvidia chips

Oracle shares fell 5% after a report from The Information raised concerns about the profitability of its rapidly expanding Nvidia-powered cloud AI rental business. The report indicated Oracle's Nvidia cloud segment achieved only a 14% gross margin on $900 million in sales, significantly below the company's overall 70% margin, primarily due to high chip costs and aggressive pricing. This challenges the financial viability of Oracle's ambitious cloud growth forecasts, including a projected $144 billion in cloud infrastructure revenue by 2030, much of which is tied to large-scale AI projects like the Stargate initiative with OpenAI.

Analysis

Oracle stock slipped 5% on Tuesday after a report from The Information that raised questions about the company's plans to buy billions of Nvidia chips to rent as a cloud provider to clients like OpenAI. Oracle had 14% gross margins on $900 million in sales in its Nvidia cloud business in the three months ending in August, according to the report, which cited internal documents. That's significantly lower than Oracle's overall gross margin of around 70%. The report said that Oracle's recent transformation into one of the most important cloud and artificial intelligence companies may run into profitability challenges because of how expensive Nvidia chips are and aggressive pricing on its AI chip rentals. In September, Oracle said that its backlog of cloud contracts, which it called remaining performance obligations, had jumped 359% in a year. It forecasted $144 billion in cloud infrastructure revenue in 2030, up from just over $10 billion in 2025. Much of that forecasted revenue is from Oracle's role in the Stargate project, in which the enterprise vendor is working with OpenAI to open five massive data centers filled with AI chips from Nvidia. Oracle's stock experienced a 5% decline following a report from The Information that highlighted significant profitability challenges within its Nvidia-powered cloud AI rental business. The report, citing internal documents, indicated a mere 14% gross margin on $900 million in sales for this segment through August, dramatically lower than Oracle's overall gross margin of approximately 70%. This margin compression is primarily attributed to the high costs associated with Nvidia chips and Oracle's aggressive pricing strategy for its AI chip rentals. Such dynamics cast doubt on the long-term profitability of Oracle's strategic transformation into a major AI cloud provider, despite the sector's rapid expansion. Despite these margin concerns, Oracle has projected substantial growth, with cloud contract backlog soaring by 359% year-over-year and cloud infrastructure revenue forecasted to reach $144 billion by 2030, up from just over $10 billion in 2025. Much of this growth is linked to large-scale, potentially low-margin initiatives like the Stargate project with OpenAI, which involves deploying numerous Nvidia AI chips. While Oracle's aggressive play for market share in the AI infrastructure space is clear, the disconnect between ambitious top-line forecasts and current segment-level profitability raises questions about sustainable earnings growth and capital allocation efficiency.

Key Decisions for Investors

• Investors should closely monitor Oracle's profitability metrics, particularly the gross margins within its cloud AI segment, as sustained low margins could temper the positive impact of robust revenue growth projections.
• Scrutinize management's strategy for improving cloud AI segment profitability, including potential pricing adjustments or cost efficiencies, during upcoming earnings calls.
• Evaluate Oracle's long-term capital expenditure plans and the return on invested capital for large-scale AI projects like Stargate, considering the initial low-margin profile of these ventures.