From the Wall Street Journal,
Signing a 12-figure contract with a customer is one thing. Collecting is a whole other matter.
A once-obscure footnote disclosure called “remaining performance obligations,” or RPOs, has become one of the most closely watched numbers for investors in AI-themed stocks, especially Oracle.
It is also a lot squishier than investors may realize, helping to explain the recent, sharp fall in Oracle’s stock.
RPOs, which have a standard definition across companies, represent contracted sales that have yet to be recognized as revenue. In other words, management believes the sales are probable, not definite.
Because of that, RPOs aren’t on the face of a company’s financial statements. Still, analysts use the number to help shape their future estimates of the company’s business. If they start to doubt the future sales are indeed probable, they are likely to take a dimmer view of a company’s outlook.
Oracle’s stock soared in early September, at one point jumping 36% in a single day, after a bombshell earnings report in which it said its RPOs had more than tripled since the previous quarter to $455 billion. Since then, Oracle’s RPOs have jumped to $523 billion as of Nov. 30, or about nine times Oracle’s revenue for the past four quarters.
Yet the stock has cratered, down 43% from its all-time high on Sept. 10. Investors have grown uneasy about the circular nature of many of the AI sector’s dealings and are looking askance at huge gains in RPOs. They are particularly wary about OpenAI’s ability to meet gargantuan future commitments.
It is widely known that about $300 billion of the increase in RPOs at Oracle was due to a five-year contract with OpenAI to supply computing capacity, although Oracle hasn’t expressly disclosed this. To meet the demand, Oracle is building new, colossal data-center complexes across the country.
The $300 billion portion from OpenAI has drawn skepticism from investors and even some Wall Street analysts. J.P. Morgan credit analyst Erica Spear titled her Dec. 15 note on Oracle: “If You Build It, Will They Pay?”
D.A. Davidson analyst Gil Luria in a Dec. 12 note said: “Since OpenAI is unlikely to deliver on its $300bn commitment, we believe the best course of action for Oracle would be to restructure that contract proactively in order to deploy capital more responsibly instead of pretending it has $523bn of RPO.”....
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