OpenAI spending spree powering much of tech. Oracle latest example

Oracle‘s historic stock surge this week marked the latest chapter in the story of a single private company that’s dominated the tech landscape for almost three years: OpenAI.

In Oracle’s blowout earnings report, OpenAI was a key catalyst due to a massive amount of money the artificial intelligence startup expects to spend on cloud computing technology in the coming years.

It’s becoming a familiar theme.

A week earlier, Broadcom shares popped almost 10% after the chipmaker and software vendor said it forged a $10 billion deal to build custom processors for a customer that analysts said was OpenAI.

Among tech’s megacaps, Microsoft has the closest link to OpenAI, having invested more than $13 billion in the company and serving as its key cloud partner for six years. Nvidia’s march to becoming the world’s most valuable company is intimately tied to OpenAI, as its graphics processing units (GPUs) sit at the heart of large language model development and are essential for running big AI workloads.

Those four companies alone — Oracle, Broadcom, Microsoft and Nvidia — have seen their combined market caps swell by over $4.5 trillion since OpenAI burst into public view with the launch of ChatGPT in late 2022. And those gains are a big reason why the Nasdaq and S&P 500 have sustained sharp rallies, with both benchmarks closing at a record on Friday.

OpenAI’s outsized influence has some market experts understandably concerned. It remains a cash-burning startup that’s governed by a nonprofit parent.

The company’s $500 billion valuation is supported by a small number of investors betting that OpenAI will prevail in the face of hefty competition from the likes of Meta and Google as well as other highly-valued newcomers like Anthropic and any number of players out of China.

“While we love ChatGPT, OpenAI is still a not for profit limited in its ability to raise capital,” said Gil Luria, an analyst at D.A. Davidson, in an interview with CNBC.

Luria, who recommends holding Oracle shares, dug into the company’s numbers as the stock was in the midst of a 36% jump on Wednesday, its biggest gain since 1992.

In its quarterly earnings report late Tuesday, Oracle said it signed four multibillion-dollar contracts with three different customers during the period. One of those was with OpenAI, which said previously that it agreed to develop 4.5 gigawatts of U.S. data center capacity with Oracle.

Investors knew, based on a filing with the SEC in June, that Oracle signed a $30 billion cloud contract with an unnamed company that’s set to begin in two years. CNBC confirmed a Wall Street Journal report from Wednesday that OpenAI has agreed to spend $300 billion in computing power over about five years, starting in 2027.

In the two trading days after its historic pop, Oracle’s stock retreated, dropping more than 6% on Thursday and another 5% on Friday, as other investors began sharing Luria’s concerns.

The new revelations about OpenAI’s massive cloud commitment provided a clearer sense of Oracle’s expanding backlog. Oracle said its performance obligations, a measure of contracted revenue that has not yet been recognized, surged 359% from a year earlier to to $455 billion.

Luria said the concentration of Oracle’s backlog with a single customer “significantly reduces” enthusiasm, particularly if “more than 90% came from OpenAI.”

Oracle didn’t respond to a request for comment.

OpenAI has made big commitments to several other cloud providers, including CoreWeave and Google, and reportedly plans to put $19 billion toward Stargate, a project President Donald Trump announced in January to bolster AI infrastructure investments in the U.S. Stargate is a joint venture between OpenAI, Oracle and SoftBank, which is separately leading a planned $40 billion investment in OpenAI.

Luria said the takeaway is that “Sam Altman has the gumption to sign very large checks without needing to worry about whether those can ever be cashed.”

OpenAI declined to comment.

While OpenAI will be losing money for the foreseeable future, the company is expecting revenue growth to continue at a breakneck pace. After hitting $10 billion in annual recurring revenue in June, OpenAI is on pace for that number to reach $125 billion by 2029, CNBC confirmed.

And on Thursday, OpenAI got a step closer to formalizing its transition to a for-profit entity. The company said its nonprofit parent will continue to have oversight over the business and will own an equity stake of more than $100 billion as the commercial entity becomes a public benefit corporation.

OpenAI needs the restructuring to take place by year-end in order to secure the entirety of the $40 billion from its latest financing round.

For Oracle, the massive increase in OpenAI spending has landed the company within shouting distance of the trillion-dollar club, which currently includes eight tech peers. Oracle’s market cap climbed to about $930 billion on Wednesday before retreating to $830 billion to close the week.

Byron Deeter, a partner at Bessemer Venture Partners, told CNBC’s “Money Movers” that he’s still skeptical of Oracle’s prospects in AI. The company has spent years trying to play catchup in cloud infrastructure, where it trails Amazon, Microsoft and Google.

Deeter said Oracle remains a “B-level hyperscaler” without meaningful positions in AI software or chips.

“Two days ago, we all thought Oracle was essentially nowhere in AI,” Deeter said, following the earnings report. “They announce this mega-deal, people think they’re the next great hyperscaler – and I don’t buy that part.”

WATCH: Byron Deeter on Adobe and Oracle