Oracle (ORCL) was supposed to be the next trillion-dollar company after all the successes last year, but it is retreating back to square one. The company recently initiated massive job cuts to finance its capital-intensive AI infrastructure ambitions, or at least that’s how the layoffs are framed.
TD Cowen estimates that the job cuts will impact 18% of Orcale’s global workforce, meaning some 20,000 to 30,000 workers are being eliminated to free up $8 billion to 10 billion in capital. All of this money will go into new or existing data centers for which Oracle needs the funds.
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Investors are obviously spooked, as layoffs are never a good thing. A thriving company expands, whereas struggling companies conduct layoffs. Oracle is not yet a struggling company, but initiating layoffs this early on is an indication that cracks may be forming.
Oracle has been a mainstream software company for decades. If it is starting to let go of its software workers in an aggressive pivot to data centers, that says a lot about the industry. The S&P 500 Software Index is down 22% year-to-date (YTD) with little recovery in sight. A marquee software company cutting almost a fifth of its workforce is another bad sign that AI is adversely affecting software.
I expect these layoffs to have a negative long-term impact on ORCL stock despite the cost savings. If software stocks no longer command a significant premium like they used to, Oracle will be among them. Oracle’s data-center and hardware operations are not mature enough to make up for the lost value on the software side.
Of course, Oracle is likely to stick around as a major company, but doubling down on data centers won’t take it to $1 trillion just yet. Why?
This is not because of Oracle per se, but because of OpenAI, which constitutes more than $300 billion if Oracle’s $553 billion of remaining performance obligations (RPO). Oracle and OpenAI recently signed a landmark $300 billion cloud/computing power deal spanning roughly five years, with a significant ramp-up starting…
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