The likelihood that Nvidia will be investing far less than $100 billion in OpenAI raises big questions for Oracle.
Foremost are whether the ChatGPT developer can make good on its five-year, $300 billion contract with Oracle, and whether the tech giant should really be recording the full amount of that deal on its own books.
As of Nov. 30, Oracle reported $523 billion of remaining performance obligations, which represent contracted sales not yet recognized as revenue. The figure , which is a closely watched footnote disclosure, was about nine times Oracle's revenue for the previous four quarters, and included the $300 billion related to OpenAI. Oracle's stock soared in early September, at one point jumping 36% in a single day, after an earnings report showed its RPOs had more than tripled since the previous quarter.
OpenAI's relationship with Nvidia has epitomized concerns about circularity in artificial-intelligence deals. The companies' letter of intent, unveiled Sept. 22, called for Nvidia to invest as much as $100 billion in OpenAI over many years. While some of the money would flow back to Nvidia for its chips, some would help OpenAI pay for things like its deal for Oracle to supply computing capacity.
Amid concerns about its debt levels and OpenAI's reliability, Oracle has faced calls to raise equity to support its investment-grade rating. The company appears to be responding.
On Feb. 1, Oracle said it plans to issue as much as $20 billion of common stock this year, as part of a broader plan to raise $45 billion to $50 billion through equity and debt financing to expand its cloud-infrastructure business.
Issuing stock would dilute shareholders, after they have already seen their shares lose about half their value since peaking in September. But with the uncertainty and circularity of AI deals being what they are, boosting the company's equity cushion seems prudent.
For its part, Oracle is already building data centers, financed with new debt, in reliance on the contract it struck with OpenAI. Oracle and Nvidia also are major customers of each other, although Oracle recently signaled it would diversify its AI-chip purchases beyond Nvidia.
Now a big chunk of OpenAI's anticipated funding is in doubt. This raises fresh questions about how OpenAI will pay for its estimated $1.4 trillion of commitments, including those to Oracle. This will depend on its ability to raise money from investors and increase revenue dramatically.
An Oracle spokeswoman, Deborah Hellinger, said, "The Nvidia-OpenAI deal has zero impact on our financial relationship with OpenAI. We remain highly confident in OpenAI's ability to raise funds and meet its commitments."
The Wall Street Journal reported on Jan. 30 that the September deal with Nvidia had stalled, after some inside Nvidia expressed doubts about the deal. Nvidia's chief executive, Jensen Huang, the next day told reporters in Taipei that the chip giant would "absolutely be involved" in OpenAI's latest funding round. When asked whether the amount would be over $100 billion, he said: "No, no, nothing like that."
OpenAI is targeting $100 billion for its latest fundraising effort, which could include Nvidia. SoftBank Group is in talks to invest as much as $30 billion more, after boosting its stake to 11% in December when it invested $22.5 billion. Amazon.com also is in talks to invest in the round, and OpenAI is aiming for an initial public offering in the fourth quarter of this year.
It is possible this all could happen, and OpenAI might raise the vast sums of money it needs. Or if OpenAI can't pay the full $300 billion, then perhaps another customer could step in to fill its place. But all of that is speculative, and the news that Nvidia is downsizing its commitment to OpenAI raises fresh questions about the likelihood that the $300 billion will come through.
This means Oracle will have a pressing question regarding its own books: Is collecting the $300 billion from OpenAI still "probable" in management's judgment? The answer has to be yes, under the accounting rules, for Oracle to include the sum in its RPOs.
How management answers the question in its coming financial reports, and how the market responds, could have knock-on effects. Oracle's investment-grade credit rating, now at triple-B, is on negative watch at S&P and Moody's, signaling a potential downgrade. Some of Oracle's debt, including a 10-year note sold in September, recently has been trading like junk bonds, and the cost to protect Oracle's debt against defaults has surged.
What Oracle can't afford to sacrifice is credibility. If the company's management continues to conclude that collectibility from OpenAI is probable, that judgment call had better be right.
