Oracle's Downfall: A Bad Bet On AI Data Centers

AI data centers has two challenges: big capex requirements and high operating expenses due to the skyrocketing cost of electricity. Another challenge is low customer switching costs. A customer like OpenAI or Anthropic rarely puts equipment into an AI data center. It simply downloads its software into the data center's bare metal servers, estimates its model, and then uploads the estimated model back to its own servers. Oracle has only one major customer and so it faces huge customer risk. Contracts tend to be soft and often include no penalty cancellation clauses. This business model only works if the vendor has access to cheap electricity like hydropower in the Nordics and very low customers. Solar and wind sell rates do not generally make the grade because fully loaded they are in fact quite high. In the case of Oracle, it went from a typical debt free software company to a 2.4 debt to revenue ratio. This includes bonds, long term lease liabilities, and short term obligations. 

Graph Showing Oracle's Steady Stock Price Decline Over Last 12 Months


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