TLDR
- Oracle generated about $900 million from Nvidia chip-powered server rentals in the three months ending August, with only $125 million in gross profit
- The AI cloud business operates with a 14% gross margin, lower than many retail businesses and below analyst expectations
- Margins fluctuated between less than 10% and slightly over 20% over the past year, averaging around 16%
- Oracle is losing considerable money on rentals of small quantities of both new and older Nvidia chips
- Depreciation expenses could reduce the margin by another 7 percentage points beyond the reported 14%
Oracle stock dropped as much as 7% on Tuesday after The Information published a report exposing the thin profit margins in the company’s AI cloud business. Internal documents showed numbers that paint a less rosy picture than many analysts had expected.
The company generated approximately $900 million from server rentals powered by Nvidia chips during the three months ending in August. That sounds impressive until you look at the gross profit of just $125 million.
That works out to a 14% gross margin. For context, that’s lower than many non-tech retail businesses.
The figure falls below what equity analysts had estimated for Oracle’s AI cloud operations. The documents revealed that sales from the AI cloud server business nearly tripled over the past year.
But revenue growth hasn’t translated to healthy margins. Over the past year, gross profit margins bounced around between less than 10% and slightly over 20%.
The average came in around 16%. That’s not the kind of number that gets investors excited about an AI play.
The Cost of Nvidia’s Chips
The 14% gross margin includes labor, power, and other direct costs of running Oracle data centers. It also factors in some depreciation expenses for equipment.
But there’s more depreciation to account for. Additional unspecified depreciation expenses would knock another 7 percentage points off the margin.
That could push the real margin into single digits. Oracle appears to be losing money on certain rentals.
The company is reportedly losing considerable sums on rentals of small quantities of Nvidia chips. This applies to both newer and older versions of the hardware.
The report specifically mentioned losses of nearly $100 million from renting access to Nvidia’s Blackwell chips. These are some of the most advanced AI processors on the market.
Market Reaction and Competitive Pressure
The stock dropped more than 6% in midday trading following the report. Retail sentiment on Stocktwits shifted further into bearish territory.
The margin pressure reflects the high cost of providing access to Nvidia’s chips. Competitive pricing in the cloud infrastructure market makes it hard to pass those costs along to customers.
Oracle has been pushing hard into the AI cloud space. The company wants to compete with Amazon Web Services, Microsoft Azure, and Google Cloud.
But the economics look challenging. Building out data centers with expensive Nvidia hardware requires massive upfront investment.
The internal documents suggest Oracle may be pricing aggressively to win market share. That strategy works if you can eventually raise prices or improve efficiency.
Right now, the numbers show Oracle is paying a steep price for its AI ambitions. The company generated $900 million in revenue from Nvidia chip rentals in the most recent three-month period, with gross profit margins averaging 16% over the past year while losing money on small-scale chip rentals.
