Why OpenAI could be a 'major risk' to Oracle

Partnership with OpenAI: A Major Risk Factor [00:00]

• OpenAI's significant financial losses, estimated at $12 billion per quarter according to Microsoft's financial statements, present a major risk to Oracle.
• Oracle's capital expenditures include building data centers contracted with OpenAI, raising questions about repurposing these facilities if OpenAI fails to pay.
• The lack of transparency in OpenAI's financial disclosures exacerbates the risk for Oracle as its largest customer.

"Open AI's potential inability to pay for its AI infrastructure could be one of Oracle's biggest risk."

Assessing Oracle's Financial Health and Equity Valuation [01:13]

• Investors assess Oracle's long-term AI potential by examining its balance sheet and earnings.
• While Oracle's financial statements show significant earnings growth, a substantial portion ($2.5 billion) comes from a non-recurring sale of a venture with Soft Bank.
• Excluding this one-time item, Oracle's operating income is growing at a respectable 12-15%, which is considered good but not explosive enough to justify a higher equity valuation.

"If you look at Oracle on the surface um the financial statements show significant growth in the earnings but if you look at the details of those earnings the earning growth was come from a nonrecurring item..."

Credit Side Concerns and Widening Credit Spreads [02:21]

• Oracle's credit spreads are widening, indicating increased perceived risk by the market.
• This widening is linked to a dramatic increase in Oracle's capital expenditures, which surged from $6 billion to $20 billion over a six-month period.
• This significant growth in capex is being funded by credit, prompting concerns about Oracle's leverage and ability to service its debt.

"If you look at credit spreads, uh Oracle's credit spreads are moving wider and wider because their capex has gone from $6 billion uh over the prior 6 months period to uh $20 billion..."

The Coreweave Proxy Effect on Oracle's Credit [03:00]

• Concerns about companies like Coreweave, a smaller AI player, can trickle into investor sentiment regarding Oracle.
• Coreweave's business model is under threat, and its expensive credit default swaps (CDS) make direct hedging difficult for investors with data center exposure.
• Consequently, investors are using Oracle's credit default swaps as a cheaper proxy for AI credit risk, leading to widening spreads for Oracle, even if it's not the most accurate representation of Oracle's own risk.

"...corv um CDS is so expensive that investors that have exposure to data to to data centers rather than trying to hedge by core viv and you know you have to pay a lot to um hedge cor risk because they are a high yield company."

Oracle's Partnership with ByteDance and TikTok [04:46]

• Oracle has a growing relationship with ByteDance, providing cloud services to its US operations.
• This partnership is evolving into a joint venture where Oracle will be a shareholder, potentially involving TikTok's US operations.
• This joint venture is expected to provide a stable customer for Oracle's AI services.

"We think that anyway Oracle and Bite Dance have a relationship that has been going on for a few years where Oracle has been providing their cloud services to Bite Danc's US operations then..."

Balancing Risks with Stable Customers and Future Profitability [05:48]

• The ByteDance joint venture can help balance the risks Oracle faces from OpenAI's potential credit event.
• If ByteDance becomes a major revenue source through this partnership, it could further reduce Oracle's credit risk and become a significant source of profitability.
• This diversification of customer base, including major clients like Microsoft and Nvidia, alongside the ByteDance venture, provides a more stable financial outlook for Oracle.

"...that balances out the risk that Oracle has to open AI where if you have an open AI credit event you probably uh that's going to be offset by the fact that you have other stable uh customers like Bite Dance..."