Why Did Oracle Stock Surge on Its AI Backlog?

TL;DR

Oracle shares surged 36% after the company disclosed $455 billion in remaining performance obligations and projected rapid cloud growth. However, roughly $300 billion reportedly depends on OpenAI buying computing capacity over five years, making the backlog's conversion into revenue dependent on OpenAI raising substantial capital, securing debt, and fulfilling its contractual commitments.

Transcript

Today's number, 3.6 million. That's how many dollars the original Darth Vader lightsaber sold for at auction last week. That makes it the most expensive piece of Star Wars memorabilia in the world. It also makes it the most expensive oath of celibacy of all time. Welcome to Profy Markets. I'm Edson. It is September 11th. Let's check in on yesterday... Read More

Key Insights

• Oracle's 36% share-price surge followed the disclosure of more than $455 billion in remaining performance obligations, robust earnings, and upbeat quarterly guidance. The rally was the company's strongest one-day gain since 1992 and lifted Oracle shares to a 98% year-to-date increase.
• Oracle's cloud revenue is projected to grow 77% to $18 billion during the current fiscal year. Management also said the cloud business could produce $144 billion in revenue by 2030, approximately ten times its current level, although Gil Luria questioned whether that target is realistic.
• OpenAI's reported agreement covers $300 billion of Oracle computing power over five years. Because that commitment represents most of the newly announced backlog, Oracle's long-term growth expectations depend substantially on one customer successfully financing and honoring an exceptionally large contract.
• Remaining performance obligations are contractual commitments, not completed sales. They do not mean that purchase orders have been issued, services have been delivered, payments have been received, or revenue has been recognized, so the reported backlog carries execution and customer-credit risks.
• OpenAI's creditworthiness is the central concern surrounding Oracle's backlog. Luria noted that OpenAI has negative gross margins, remains organized as a not-for-profit, is fundraising, and needs further capital to meet commitments involving Oracle, Microsoft, CoreWeave, Stargate, SoftBank, Crusoe, Lambda, and Google.
• Oracle's competitive advantage is its position as a major cloud provider that does not develop its own large language models. AI startups may prefer Oracle because it supplies computing infrastructure without directly competing against their models, unlike Amazon, Microsoft, and Google.
• The broader AI rally reflected renewed investor confidence in the entire sector, not only Oracle. Oracle's announcement also lifted CoreWeave, TSMC, Broadcom, AMD, and Nvidia, even though CoreWeave competes directly with Oracle and did not win the reported OpenAI business.
• AI infrastructure growth depends increasingly on debt financing for data-center construction. CoreWeave raised $10 billion of debt during the preceding year, while OpenAI, Crusoe, Stargate, Meta, and xAI also require infrastructure funding, increasing competition for lenders and making capital availability less certain.

Questions & Answers

Q: Why did Oracle stock rise 36% after its earnings report?

Oracle shares rose 36% because the company reported robust earnings, upbeat revenue guidance, and more than $455 billion in remaining performance obligations. Investors were also encouraged by projected cloud revenue growth of 77% to $18 billion in the current fiscal year and management's forecast that cloud revenue could reach $144 billion by 2030.

Q: What does Oracle's $455 billion backlog actually represent?

Oracle's $455 billion figure represents remaining performance obligations under contracts for future services. It is not the same as recognized revenue or cash already collected. According to Gil Luria, the figure does not mean purchase orders have been issued or services delivered, so converting it into revenue depends on customers remaining able and willing to fulfill their commitments.

Q: How important is OpenAI to Oracle's future cloud revenue?

OpenAI appears to be extremely important because its reported agreement to purchase $300 billion of computing power over five years accounts for much of Oracle's newly announced backlog. That concentration means Oracle's future cloud revenue could depend heavily on OpenAI restructuring successfully, raising substantial capital, borrowing enough money, and following through on its contractual computing purchases.

Q: Why is OpenAI's creditworthiness a risk for Oracle?

OpenAI's creditworthiness matters because it reportedly committed $300 billion to Oracle while also carrying infrastructure obligations involving Microsoft, CoreWeave, Stargate, SoftBank, Crusoe, Lambda, and Google. Gil Luria noted that OpenAI has negative gross margins, remains a not-for-profit, is fundraising, and is renegotiating terms with Microsoft, all of which create uncertainty about financing those commitments.

Q: What competitive advantage does Oracle have in AI cloud infrastructure?

Oracle is one of four major cloud infrastructure providers discussed alongside Amazon Web Services, Microsoft Azure, and Google Cloud. Unlike those three companies, Oracle does not develop its own large language models. That distinction can make Oracle attractive to AI startups seeking a computing partner that supplies infrastructure without potentially competing against their products or business ambitions.

Q: Is Oracle's $144 billion cloud revenue target for 2030 realistic?

Gil Luria said he did not consider the $144 billion target realistic because it would require Oracle's cloud business to become roughly ten times larger by 2030. He still expected significant growth, especially during the current and following years. His assessment was that an ambitious target could motivate expansion without necessarily being achieved in full.

Q: Why did Oracle's announcement lift other AI stocks?

Oracle's announcement reinforced investor enthusiasm for the broader AI trade. Shares of CoreWeave, TSMC, Broadcom, AMD, and Nvidia rose alongside Oracle, even though CoreWeave is a direct competitor that did not secure the reported business. Luria interpreted the broad rally as market confidence in rising AI infrastructure demand rather than a reaction limited to Oracle's individual prospects.

Q: How could OpenAI finance its computing commitments?

OpenAI would likely need to restructure, raise additional capital, expand its business, and rely heavily on debt financing to meet its computing commitments. The challenge is that several companies, including CoreWeave, Crusoe, Stargate, Meta, and xAI, also need financing for data centers. Greater competition for loans could make sufficient debt harder or more expensive to obtain.

Summary & Key Takeaways

• Oracle recorded its strongest one-day gain since 1992 after reporting robust earnings, upbeat guidance, and more than $455 billion in future contract revenue. Investors focused on projected cloud revenue growth of 77% to $18 billion this fiscal year and management's expectation that the cloud business could reach $144 billion by 2030.

• The reported $300 billion computing agreement with OpenAI explains much of Oracle's extraordinary backlog increase. Gil Luria cautioned that remaining performance obligations represent contracts, not purchase orders, delivered services, or recognized revenue. Their value therefore depends heavily on whether OpenAI can restructure, raise capital, and eventually pay its extensive infrastructure commitments.

• Oracle benefits strategically from being a major cloud infrastructure provider that does not develop its own large language models. AI companies may prefer a computing partner that will not compete with them. Still, financing the industry's planned data-center expansion will require substantially more debt, creating competition among OpenAI, CoreWeave, Meta, xAI, Stargate, and others.