Oracle, one of the world’s leading cloud companies, is going through a crisis, according to a recent FT(Financial Times) report. The report stated that Oracle’s plans to achieve a 10 billion US dollar backing from Blue Owl Capital regarding the data center in Michigan have come to an abrupt halt. Even though Oracle stated that the report was incorrect, the damage had already been done, as the stock prices of Oracle (ORCL) slipped 5% following the incident.
It must be inferred that the bad news hit the industry hard. Previously, Blue Owl Capital had plans to fund Oracle to build a 1 gigawatt facility for OpenAI in Saline Township, Michigan. Among several reasons for the pullback, the chief reason is stated as Oracle’s growing debt levels and overspending on AI resources. The FT report that carried the news cited insider information regarding this matter.
Debt, Obsolescence Risks Behind Investor Fears Over Oracle’s AI Hyperscaling
Investors have been worried about Oracle’s hyperscaling for building the necessary infrastructure for its artificial intelligence systems. While hyperscaling allowed Oracle to not spend its cash reserves on expensive infrastructure, it comes with several background issues, especially ones that raise concern among investors.
One of the major problems of hyperscaling is hidden debt and off-balance sheet obligations. This is detrimental to investors as accurate data regarding the company’s performance is not revealed when there are off-balance sheet obligations. The debt that builds up in the background is also risky, as if the infrastructure is later rendered obsolete, the company is still obligated to pay the debt with interest.
This rather heavy dependence on private equity firms makes Oracle’s portfolio look bad among investors. Couple this with Blue Owl Capital halting the talks with Oracle. The market was bound to crash.
Blue Owl Exit: Political Unrest, Hidden Debt Snarl Oracle’s Michigan Data Center Deal
Initially, Blue Owl was interested in funding the project. However, the reasons stated above, like the off-balance sheet debt, made them rethink their approach, which consequently led to them dropping the idea of funding Oracle for building a data center.
The structure of the repayment was yet another problem that bugged Blue Owl, according to people closely involved in overseeing the project. Despite dropping the plans for the 1 gigawatt data center, Blue Owl is still occupied with two other projects from Oracle.
Another problem that could have made Blue Owl rethink the proposition was the political situation of Michigan. According to sources, the political leadership that initially slashed taxes to lure in hyperscalers like Oracle had to be pulled out later due to a bipartisan backlash from lawmakers.
Environmental activists and the city’s leading political entities also raised concerns over the data center that was being planned to be established. The major question raised was how the power costs would be offset for maintaining the data center. This induced fear among residents who concluded that citizens would bear the brunt of subsidies that were thought to be put in place for operating the data center.
Oracle Denies Blue Owl Ties as Investor Panic Sparks AI Stock Sell-Off
Oracle retaliated to the report by stating that the talks regarding the funding for the Saline Township data center are ongoing; however, Blue Owl is not a part of these talks at all. In another report from Bloomberg, it was noted that Oracle stated that its project development partner, Related Digital, has shortlisted several private equity firms, of which Blue Owl was not a candidate.
The overall outlook of the market, despite Oracle’s claims, was negative. Investors were pushed into panic mode, and selling pressure dominated the market. This had broader effects on the whole AI-tech-related stock market as entities like Broadcom, NVIDIA, AMD, and CoreWeave all saw drops in the 4-7% range, with CoreWeave taking the biggest fall.
