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Investing.com -- Oracle (NYSE:ORCL) stock fell as much as 7% Tuesday following a report from The Information that revealed the company’s AI cloud business operates with razor-thin gross profit margins, potentially challenging the profitability of its ambitious AI expansion.
According to internal documents cited in the report, Oracle generated approximately $900 million from rentals of servers powered by Nvidia (NASDAQ:NVDA) chips in the three months ending in August, with a gross profit of just $125 million - translating to a 14% gross margin. This figure is lower than many non-tech retail businesses and falls below what many equity analysts have estimated.
The documents showed that while sales from Oracle’s AI cloud server business nearly tripled over the past year, gross profit margins fluctuated between less than 10% and slightly over 20%, averaging around 16%. The report also indicated that Oracle is losing "considerable sums" on rentals of small quantities of both newer and older versions of Nvidia’s chips.
The 14% gross margin figure reportedly accounts for labor, power, and other direct costs of running Oracle data centers, including some depreciation expenses for equipment. Additional unspecified depreciation expenses would reduce the margin by another 7 percentage points, according to the documents.