OpenAI signed a contract to purchase $300B in computing power over the next five years from Oracle, beginning in 2027, marking one of the largest cloud contracts ever signed.
Oracle shares surged as much as 43% on Wednesday after the company revealed it added $317B in future contract revenue during its latest quarter, briefly making Oracle Chairman Larry Ellison the richest man in the world, surpassing Elon Musk with a net worth of almost $400B.
The Oracle contract will require 4.5 gigawatts of power capacity, or the equivalent of electricity produced by more than two Hoover Dams, which could power roughly four million homes.
Are they sure OpenAI is good for the money?
OpenAI is currently unprofitable and disclosed in June that it was generating around $10B in annual revenue, less than one-fifth of the $60B it will have to pay Oracle annually. Last fall, Sam Altman told investors that OpenAI won’t generate a profit until 2029, and expects to lose $44B before doing so. Is that in addition to the $300B deal it just made? So $344B in losses?
Meanwhile, Oracle will be concentrating a large portion of its future revenue on one customer and will likely have to take on debt to buy the AI chips needed to power its data centers. So it’s a risky bet for them too.
The WSJ reports that compared with Microsoft, Amazon and Meta, Oracle has a far greater debt load relative to its cash holdings, and its spending is already outstripping its cash flow.
- Microsoft has a debt-to-equity ratio of 32.7% versus Oracle’s 427%.
- Microsoft’s operating cash flow was about $136B last year, with capital expenditures including leases of $88B.
- Oracle’s operating cash flow was $21.5B, with $27.4B in capital expenditures.
Then again, it’s not like there won’t be other buyers if OpenAI can’t deliver on their end of the bargain. Perhaps the contract was all that Oracle needed to secure the capital and kick off its data center development — which no-one would bet against as being a good investment during the next decade.
