Oracle and Broadcom Earnings Fuel AI Bubble Fears

The AI Boom and the Emerging Concerns

Oracle and Broadcom, two major players in the technology sector, have seen their stock prices soar due to the artificial intelligence (AI) boom. However, recent earnings reports from both companies have raised concerns about a potential AI bubble.

Oracle reported its financial results for the September–November period, showing a 14% year-on-year increase in revenue to $16.06 billion (approximately 23.73 trillion Korean won). Adjusted earnings per share were $2.26, which marked an improvement in profitability. However, the company's revenue fell slightly short of market expectations at $16.21 billion.

A notable aspect of Oracle's performance was the growth of its AI-focused segment, Oracle Cloud Infrastructure, which saw a 68% year-on-year increase in revenue. Despite this, the segment still missed forecasts. Investors became anxious as capital expenditures, which reflect data center spending, jumped by $3.5 billion from the previous quarter to $12 billion—$3.7 billion above expectations.

Following the earnings report, Oracle's stock plummeted 11.6% in after-hours trading. Although the stock had reached a record high in September, it quickly reverted to pre-surge levels within three months.

On the 11th, Bloomberg reported that the completion of Oracle’s Texas data center, intended for use by OpenAI, was delayed from 2027 to 2028. This news caused the stock to fall an additional 4%, as investors worried about the delayed returns on their investments. Oracle responded by stating, “There are no delays at any site required to fulfill contractual obligations, and progress remains on track.”

Broadcom's Challenges Amid AI Growth

Broadcom faced a similar situation. On the 11th, the company reported revenue of $18.02 billion (26.62 trillion Korean won) for the September–November period, representing a 28% year-on-year increase. Net profit reached $4.32 billion, a 97% year-on-year increase—exceeding market expectations. As a key beneficiary of the AI trend, Broadcom’s stock had risen 75% this year, driven by the strong performance of Google’s TPU (Tensor Processing Unit), which it designs.

However, during the post-earnings conference call, it was revealed that AI chip margins were smaller than anticipated, leading to a significant drop in the stock price. CEO Hawk Tan stated, “Rapidly growing AI revenue has lower gross margins than non-AI revenue.” As a result, Broadcom’s stock dropped over 11% in regular trading the following day.

Resurfacing Fears of an AI Bubble

As these two AI leaders released concerning earnings reports, dormant fears of an AI bubble resurfaced. Jed Ellerbroke, a portfolio manager at Argent Capital Management, noted, “Investors aren’t entirely pessimistic about AI but remain cautious, anxious, and hesitant.”

The recent performance of Oracle and Broadcom highlights the challenges facing the AI sector. While the potential for growth is immense, the current market dynamics suggest that investors are becoming more cautious. The underwhelming earnings reports and the impact on stock prices indicate that the AI market may be more volatile than previously thought.

Key Takeaways

• Oracle's Performance: Despite a 14% increase in revenue, Oracle's results fell short of expectations, particularly in its AI-focused segment. The company also faced increased infrastructure costs, which contributed to a sharp decline in its stock price.
• Broadcom's Challenges: While Broadcom exceeded market expectations in terms of revenue and net profit, concerns about AI chip margins led to a significant drop in its stock price.
• Market Sentiment: The recent earnings reports have reignited concerns about the sustainability of the AI boom, with investors showing signs of caution and hesitation.

As the AI sector continues to evolve, it will be crucial for companies to address these concerns and demonstrate long-term value. The path forward for Oracle, Broadcom, and other AI players will depend on their ability to navigate these challenges and maintain investor confidence.