Will Oracle's big drop be a warning for CoreWeave?
Even if AI is not nearing the bubble that some fear, it's becoming increasingly evident that Wall Street is starting to get very uncomfortable with the massive amounts of money that is getting spent by companies in the sector.
That became further evident this week as shares of Oracle (ORCL) plunged 11% on Thursday, a drop driven by concerns over the company's dramatic escalation in spending. The company said in its latest earnings on Wednesday that its capital expenditures in the fiscal year 2026 second quarter were about $12 billion, up from $8.5 billion the previous quarter.
Oracle said that its capex is expected to reach $50 billion for the fiscal year ending in May 2026, which is $15 billion higher than it had projected in September.
Although the software giant reported that cloud sales had increased 34% to $7.98 billion and revenue in its infrastructure gained 68% to $4.08 billion, it fell slightly below analyst expectations.
What Wall Street's reaction to Oracle's latest earnings show is that the amount of revenue needed to assuage concerns about spending for companies in the AI sector will likely need to be increasingly substantial. It also indicates that analysts are starting to lose patience with how long it's expected to take to see a payoff from all this spending.
“Oracle faces its own mounting scrutiny over a debt-fueled data center build-out and concentration risk amid questions over the outcome of AI spending uncertainty,” Jacob Bourne, an analyst at Emarketer, told Bloomberg. “This revenue miss will likely exacerbate concerns among already cautious investors about its OpenAI deal and its aggressive AI spending.”
For Oracle, its $300-billion deal with OpenAI, which had initially sent its stock soaring and briefly made founder Larry Ellison the richest man in the world, is coming back to haunt the company.
When OpenAI CEO Sam Altman recently issued a "code red" warning about the mounting competition it is facing, particularly from Google's (GOOG) Gemini, it brought into focus not only the risks OpenAI is facing, but by extension those that Oracle are facing too. OpenAI is set to spend $1.4 trillion over the next eight years with no clear path to generating the kind of revenue to make up for that kind of massive expenditure.
“Clearly there's been a reversal in terms of the market's perception of OpenAI in the last couple of months,” BNB Paribas analyst Stefan Slowinski told Yahoo Finance. “The OpenAI ecosystem obviously has been suffering as a result.”
In other words, if OpenAI can't find a way to monetize its business because it loses too much ground to Google, that leaves Oracle with a customer who may not be able to pay for its data center capacity.
Oracle's stock has dropped 40% from its peak in September, wiping out roughly $360 billion from its market cap. It lost about $67 billion just on Thursday.
CoreWeave's debt load raises concern
During the company's third-quarter earnings call last month, CoreWeave CFO Nitin Agrawal said that its capex in 2026 will "be well in excess of double that of 2025." He noted that CoreWeave's capex for 2025 will be in the range of $12 billion to $14 billion, which could put its expenditures next year close to $30 billion.
"These investments in our infrastructure platform will strengthen our competitive moats and support our continued hyper-growth," Agrawal said.
CoreWeave's revenue soared 134% year-over-year in Q3 to nearly $1.4 billion, leading Compass Point analyst Michael Donovan to see "durable" growth for the company going forward.
But just as Bourne noted the "mounting scrutiny over a debt-fueled data center build-out" from Oracle, similar concerns are being expressed about CoreWeave's own debt load, which sits at about $14 billion. Its business model is essentially centered around taking out large amounts of debt to buy Nvidia (NVDA) chips and then renting out computing capacity to customers.
The company's stock slipped as much as 5.4% on Wednesday when it offered up a $2.25 billion convertible senior note offering, a debt issuance that raised more concerns about its debt load.
As analyst Gil Luria told The Verge's Elizabeth Lopatto in an article she wrote last month questioning CoreWeave's business model, the company has “to keep borrowing more and more because they spend more money than they can get, structurally. They have to continue to borrow to pay interest on the last loan.”
Speaking at he Wall Street Journal’s Tech Live conference in November, CoreWeave CEO Michael Intrator brushed aside concerns about an AI bubble.
“It’s very hard for me to worry about a bubble as one of the narratives when you have buyers of infrastructure that are changing the economics of their company,” he said. “They are building the future.”
However, the other risk most pointed out with CoreWeave is its highly concentrated customer base, with Microsoft (MSFT) accounting for a substantial amount of its revenue, followed by Meta (META).
It also has a $22 billion deal with OpenAI. This was agreed to before OpenAI signed its $300 billion deal with Oracle.
In a report last month, Nick Del Deo, analyst at MoffettNathanson, said that OpenAI "should grow to become CoreWeave's biggest customer as its backlog is installed."
But as Oracle has found out, that might not work in CoreWeave's favor as OpenAI's revenue generation still seems years away.
"CoreWeave is saddled with massive debt and, except in the absolute best-case scenario of fast AI adoption, has no obvious path toward profitability," Lopatto wrote for The Verge.