Oracle’s AI Bet Is Facing Its First Stress Test

Oracle’s stock is now trading nearly 45% below its September peak. What happened?

The sell-off started Thursday, December 11, after Oracle missed quarterly revenue expectations and raised its capex outlook again, sending shares down 11%. The following Wednesday, the Financial Times reported that the company’s largest data center financing partner, Blue Owl Capital, opted not to back Oracle’s newest $10 billion AI data center.

Blue Owl’s decision reflects growing skepticism about Oracle’s massive bet on data centers, and increasing concern about the sustainability of the company’s debt load. 

Larry Ellison, Oracle’s co-founder, CTO, and executive chairman, said that the firm will build “more cloud infrastructure data centers than all its infrastructure competitors combined,” and last quarter, Oracle reported half a trillion dollars in booked cloud revenue, anchored by its five-year, $300 billion deal with OpenAI. 

Building the data centers to support these cloud computing deals requires cash that Oracle doesn’t have, and the company has filled the gap with debt. 

Oracle’s big bet now hinges on a simple assumption: AI demand will grow exactly as forecast.

Remaining performance obligations (RPOs) represent expected future revenue that hasn’t been recognized yet. It includes deferred revenue that has already been invoiced but not yet delivered, and unbilled amounts from multiyear contracts.

Oracle was put in a precarious position by OpenAI. Three months ago, OpenAI promised them we’re going to spend $300 billion with you over the next five years. At the time, that was OpenAI’s biggest commitment, and it looked like it was going to come to fruition. 

But over the next couple of months, OpenAI made $1.4 trillion in commitments to a lot of different companies, and at some point we all realized they didn’t actually intend to live up to all of them. 

That leaves Oracle in a bind, as it needs to borrow a lot of money to build the data centers to serve this contract that may or may not materialize. 

In their earnings call, Oracle executives said we have $523 billion of remaining performance obligations in spite of the fact that we all know that $300 billion of that is from one company that may or may not end up spending it. 

Instead of acknowledging that, Oracle executives just insisted they would stay below a 3.5x debt-to-EBITDA ratio, which they are already close to, and so they’re going to find creative financing solutions. 

At the same time, Oracle’s credit default swaps have hit an all-time high, which means that the next time the company has to raise debt, it’s gonna be harder and more expensive. That makes it even harder to believe that Oracle can live up to its obligations.

What stood out in Oracle’s most recent earnings report was that since September, capex expectations have increased 40%, while RPOs have increased only 15%. Are Oracle executives realizing that all these data centers might cost more to build than they expected?

It’s not going to get any easier with Oracle’s cost of debt increasing and growing public pushback against data centers. Just last week, a group of Democratic senators opened an investigation into how data centers are driving up electricity costs for consumers. 

This will be a big ballot issue in 2026. Electricity prices will become what egg prices were in 2022 — a calculable proof point of unaffordability — only this time the perpetrator won’t be the government, it will be Big Tech.

The most ascendant retail platform isn’t Shopify, Shein, or Depop — it’s TikTok.

TikTok Shop, launched in the U.S. in 2023, allows brands to sell their products directly in the TikTok app. It also allows creators — who are rewarded through affiliate commissions — to promote those products directly to their followers.

TikTok takes an 8% cut of each transaction — almost half as much as Amazon and eBay charge. 

TikTok Shop processed $19 billion in global gross merchandise value (GMV) in Q3. That’s almost as much as eBay ($20 billion), a platform that’s been around for 30 years.

It’s growing much faster than legacy marketplaces. In November, U.S. monthly spending on TikTok Shop rose 52% year over year. In other words, TikTok Shop is growing faster than Oracle, Amazon, and Google Cloud.

The reason it's working is obvious: TikTok is where young people spend most of their time. Most U.S. teens use the app daily, and half of them spend roughly two hours per day scrolling through videos. 

The more time that users spend with their favorite content creators, the stronger the bond between influencers and their audience becomes. 

In fact, roughly half of Gen Z now trust their favorite influencers more than they trust journalists or public officials, and they increasingly want product recommendations from these trusted sources.

The impact of the creator economy has moved down funnel. Not only are “influencers” creating entertainment and news, they’re curating mainstream shopping demand and driving sales on their native platform. 

This suggests that TikTok U.S. is more valuable than many people realize. According to the deal that Trump structured in September of this year, TikTok U.S. is worth $14 billion. Granted, half its profits will go back to its Chinese parent company, so if $14 billion buys half TikTok U.S.’ profits, the deal implies a full TikTok U.S. is worth $28 billion. 

Still, $28 billion is less than the market cap of Extra Space Storage and Ryanair — and that’s for a company that is both the fastest-growing social media platform and the ninth-largest online marketplace in the world.

Some of the biggest brands in the world are now listing directly on the platform — brands like Ralph Lauren, and Disney, and Samsung. TikTok isn’t just coming for Instagram’s lunch — they’re coming for Shopify’s lunch, and Target’s lunch, and possibly even Amazon’s lunch. 

This is great news for ByteDance, but more important, great news for Larry Ellison and the other guys who got in on this deal. 

We thought they’d bought America’s most ascendant media platform. Turns out they bought America’s most ascendant retail platform too.

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In just the past two years, the cost of raising a child has increased 25% to almost $300,000 — and that's not including college. Meanwhile, median earnings have increased just 3%. With parenthood increasingly out of reach, more Americans are turning toward “pet parenthood” instead.

The share of U.S. adults younger than 50 without children who say they are unlikely to ever have kids rose 10 percentage points between 2018 and 2023 (from 37% to 47%).

The biological urge to care for a dependent hasn’t disappeared but rather shifted. A Harris Poll found that 43% of Americans would prefer to have pets over children in the future, and the top reasons for Gen Zers and millennials were that pets are easier to take care of and less of a financial strain than children. 

As Americans have fewer children, they’re spending more on pets. Psychology researchers from the University of North Carolina at Chapel Hill and The Ohio State University found that at both the national and county levels, lower U.S. birth rates were strongly associated with higher pet expenditures. 

Pet ownership may be less expensive than parenthood, but it's still not cheap. The average Gen Z pet owner spends over $6,000 per year on their pet, and 3 in 10 are in debt because of their animal. Pet owners from the boomer generation spend less — about $2,400 annually — on their furry friends. 

Pet ownership can also take the place of romantic partnerships. In a survey sponsored by Rover, a pet-sitting platform, nearly 225 out of 1,000 dog and cat owners in the U.S. said they had intentionally delayed dating or marriage because of their close bonds with their pets.

In one small study, owners who viewed their dog as their soulmate were asked whether they would save the life of a dog or a person. More than half of dog owners chose to save their dog over a human, and 1 in 4 chose to give money to a puppy in need over a child in need.

Americans’ attachment to animals has created a burgeoning pet economy. The U.S. pet industry is now worth an estimated $157 billion, more than the entire North American smartphone market ($75 billion). Demand for animal services — like healthcare — has been particularly strong. Americans spent roughly $38 billion on vet care in 2023, up from $29 billion in 2019. 

Private-equity firms have taken interest. Between 25% and 30% of veterinary practices in the U.S. are now owned by private-equity companies or large corporations, up from 8% a little more than a decade ago. 

Nestlé is another beneficiary of the pet economy boom. Known more for its chocolates and coffee, Nestlé has transformed into the largest pet food seller in the U.S., with pet food accounting for more than 20% of its revenue last year. 

As the industry has grown, so has its demand for human capital. The number of veterinarian and animal services jobs is expected to increase 10% and 11%, respectively, over the next 10 years, much faster than the 3% average for all jobs. 

The rise of pet parenthood is an entertaining story and an investment trend worth monitoring. But it’s also a bleak indication of Americans’ growing disinterest in human community. When substituting human companionship with animals becomes normal out of laziness, economic pressure, or fear, it’s hard to avoid the conclusion that something in the system has gone very wrong.

NOTE: Prof G Markets will not publish next week. We’ll be back in your inbox on January 5. Happy holidays!

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