Oracle shares drop 7% after report flags lower-than-expected cloud profit margins from Nvidia chips

Oracle Corp. shares fell almost 7 per cent on Tuesday following a report that the profit margin in its cloud computing segment is lower than what many on Wall Street had estimated.

During the three months ending in August, Oracle generated approximately $900 million in revenue from renting servers that use Nvidia Corp. chips. However, the company only achieved around $125 million in gross profit, according to internal documents reported by the Information. On Tuesday, Oracle's shares dropped as much as 7.1%, while Nvidia's shares declined about 0.6%, reversing an earlier rise of nearly 2%.

According to the report, Oracle was losing “considerable” amounts of money in some cases on its rentals of smaller quantities of Nvidia chips, including both new and old graphics processing unit.

Oracle stock performance

Last month, the shares soared nearly 36% after the company issued an optimistic outlook for its cloud business, solidifying the software maker’s position in the race to support demand for artificial intelligence computing.

Oracle's stock has risen over 60% this year, driven by increased demand for AI computing, which has accelerated revenue growth. In September, Oracle forecasted a 700% increase in revenue from its cloud services over the next three fiscal years, leading to a 36% surge in its stock price on September 10.

The substantial costs associated with acquiring chips and expanding data center capacity have put pressure on Oracle’s overall gross margin, which does not include operating expenses. In its latest earnings report, Oracle reported a gross margin of 67.3%, marking the lowest level in over a year, based on Bloomberg data.

Bloomberg previously reported that Oracle entered into a deal with ChatGPT operator OpenAI to provide 4.5 gigawatts of data center capacity, which is enough to power millions of homes in the US. Additionally, Oracle is involved in a consortium of buyers close to finalising an agreement to purchase the US operations of TikTok.