AI data centers has two challenges: big capex requirements and high operating expenses due to the skyrocketing cost of electricity and the power intensive nature of GPUs. Another challenge is low customer switching costs. A customer like OpenAI or Anthropic rarely puts equipment into an AI data center. It simply downloads its software into the data center’s bare metal servers, estimates its model, and then uploads the estimated model back to its own servers. In Oracle’s case, it has only one major customer and hence faces huge customer risk.
AI data center contracts tend to be soft and often include no penalty cancellation clauses with 60 or 90 days prior notice. This AI data center business model only works if the vendor has access to cheap electricity like hydropower in the Nordics and lots of customers as oppose to one or two large ones. Solar and wind power do not generally make the grade because their fully loaded pricing is in fact quite high.
In the case of Oracle, the gargantuan capex spending transformed it from a typical debt free software company to a heaavy 2.4 debt to revenue ratio. This includes bonds, long term lease liabilities, and short term obligations. Recently issued bonds got coupon rates exceeding 6.5%, which is in the junk bond range.
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