- Michael Allison, CFA
- Sep 13
- 2 min read
Updated: Sep 15
By Michael Allison, CFA
The Oracle of Austin
This week’s Chart helps build on last week’s musings about being on the lookout for a Canary in the Coalmine. That comment was in the context of META’s $29bn debt issuance taking the company from a net positive cash position to net cash negative, and the company’s willingness to degrade its balance sheet for the sake of the AI capital spending horserace.
The above Chart shows that for the first time in their history, Austin, TX-based Oracle Corporation (NYSE: ORCL) is free cash flow negative - and in a MAJOR way! Capex is up 13-fold over the last five years (Source: Yahoo Finance). It costs a lot to compete with the Big Boys in the Cloud.
This week ORCL reported quarterly results, and they missed on both revenue and earnings.
The stock was up 40% on the day. 😳 🚀
Why?
Because the company also announced they’d struck a $300bn deal with OpenAI to provide cloud computing services over the next several years. That’s great, right?
Well… This cynical old former Telecom analyst (during the dot.com era) smells something…smelly.
Analysts ask questions and I have a few:
How did the 4th player win this business over the Big 3 providers: Google, Microsoft, and Amazon? (Potential Answer: It’s quite possible that they “bought the business” with very poor economics.)
Why didn’t OpenAI spread that commitment across the group and not concentrate such a large bet on ORCL? What gave them the confidence that ORCL could deliver on the service to which they committed?
What gave ORCL the confidence that OpenAi could actually pay for the services for which they contracted? (Potential Answer: They can’t without external financing.)
How will ORCL finance all the billions of incremental capital expenditures required to provide the services under this new contract? (Potential Answer: With the stock up 40% in one day, if ORCL’s CFO is worth their salt, they’re already making plans for a secondary offering to sell new shares of stock to the public.)
As I wrote last week, I think I’m likely very early in worrying about canaries in coal mines, and this cycle could very well last for several more years. But something will eventually slow down this “Mother of All Semiconductor Cycles” known as the AI spending boom.
Experience has taught me that trouble usually surfaces first in balance sheets and cash flow statements. So that’s where I’m growing increasingly watchful.
Interested in reading more of Mike's weekly newsletters? Click below to view The Sunday Drive.
