Why We're Overlooking Oracle’s Pain, Focusing on Capex, Capacity Buildout
Adobe and Salesforce comments indicate that AI adoption and usage continue to rise.
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The Fed delivered the much-expected quarter-percentage-point rate cut on Wednesday. Despite updated economic projections, comments from Fed Chair Jerome Powell suggest we could see more cuts ahead, depending on incoming data. And we have some big pieces coming next week. If you read our comments ahead of yesterday’s Fed policy announcement, then you know that Fed Day was largely what we expected. But the tone from Powell wasn’t as hawkish as we, or many others, expected, which explains the market’s post-policy move up.
But that move is getting traded in today for what appears to be a morning move lower in the market led by the shares of Oracle (ORCL) . You’ll recall that earlier this year, Oracle and OpenAI announced a deal that included $300 billion, five-year cloud deal. That led Oracle to share its remaining performance obligations (RPOs) jumped to $455 billion and boost its fiscal 2026 capital expenditure figure to $35 billion.
That set the stage for Oracle’s quarterly results last night, which missed market revenue expectations after stripping out a one-time gain related to the sale of its stake in Ampere. A mix of other obstacles are in front of Oracle, too, as its business shifts more toward the lower-margin cloud segment. This is the opposite of what we’re seeing at Axon (AXON) , as its higher-margin software and services business becomes a larger part of the overall revenue pie. When we see the positive mix shift toward a higher margin business, that has wonderful implications for cash flow and EPS growth. When it comes to a lower margin business, as is the case with Oracle’s cloud business compared to its legacy software business, not so much. To that, we can add Oracle guiding current quarter earnings per share to $1.64-$1.68, below the market consensus of $1.72
That goes a long way to explaining the drop we are seeing unfold in ORCL shares, especially after the rebound they’ve had over the last few weeks.
But let’s talk about some Oracle items that are more germane to the Portfolio and its holdings. Oracle shared that its capital spending would rise by $15 billion more than previously expected, so around $50 billion. With our Portfolio hat on, that speaks to greater demand for chips and networking equipment, good for several of our holdings. Oracle’s remaining performance obligation climbed by 15% or $68 billion sequentially to $523 billion, which falls in the camp of rising AI adoption and usage.
Two Comments That Stood Out
This one was made by Oracle’s Larry Ellison:
We are now committed to a policy of chip neutrality where we work closely with all our CPU and GPU suppliers… Of course, we will continue to buy the latest GPUs from NVIDIA, but we need to be prepared and able to deploy whatever chips our customers want to buy.
This suggests growing adoption for AI chips like the ones from Amazon (AMZN) and others, a data point that reinforces our bullish stance on Marvell (MRVL) shares. It also suggests there could be some room in the mix for Qualcomm (QCOM) and its data center chip efforts. We’ll know more about that in the coming quarters and how that effort will mesh with its other end-market diversification strategies.
The second comment came from Oracle CEO Clay Magouryk:
We have ambitious, achievable goals for capacity delivery worldwide. Oracle Cloud Infrastructure (OCI) now operates 147 live customer-facing regions with 64 more regions planned.
A clear message that demand for AI, data center, and networking chips, as well as corresponding networking and power demands, will continue to rise. We see that setting up for some favorable comments later today when Arista Networks (ANET) , Marvell, and others present at the Barclays Technology Conference.
We will concede that the rising capital spending figures are going to rekindle questions about funding as well as the risk of overcapacity.
We’ll continue to follow the former, but in terms of capacity, let’s remember the findings discussed in OpenAI’s State of Enterprise AI report we reviewed just a few says ago.
During last night’s earnings call, Adobe (ADBE) shared that total new AI-influenced annual recurring revenue (ARR) now exceeds a third of its overall book of business. Using its $25.20 billion overall ARR figure exiting the quarter as a base, that implies AI-influenced ARR around $8.5 billion compared to $5 billion exiting the August quarter.
This morning, the U.S. Department of Transportation (USDOT) announced it will deploy Salesforce’s (CRM) Agentforce AI platform to “help create a more efficient and responsive transportation system by handling routine tasks, offering citizens around-the-clock support, and generating immediate alerts with proposed optimal mitigation strategies for traffic and infrastructure incidents.”
More signs that AI adoption and usage are rising, and that the north star keeps us bullish on the Portfolio’s direct and indirect AI-related exposures. We will continue to follow enterprise, consumer, and other AI adoption and usage metrics, keeping an eye out for when the incremental growth rate for both starts to slow. So far, that does not appear to be on the horizon.
At the time of publication, the Pro Portfolio was long MRVL, AMZN, AXON, and QCOM.
