The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, June 12 (Reuters Breakingviews) - Even Larry Ellison is awestruck by the artificial intelligence craze. Because the 80-year-old has “never seen anything remotely like it” in the nearly half-century since he started Oracle ORCL.N, the software developer will huff and puff to try and keep up with the datacenter Joneses.

Five years ago, Oracle invested little and reaped plenty. Capital expenditure equaled about 4% of revenue. Top-line growth typically fell short of 10%, but the cloud computing company minted money. Nearly a third of sales converted into free cash flow, leaving plenty for dividends and stock buybacks.

Oracle’s latest financial results, released on Wednesday, make clear how things have changed. It spent more than $9 billion on property, plant and equipment, or nearly 60% of quarterly revenue. Hefty investment exceeded cash generated by operations, burning nearly $3 billion.

Ellison says outlays will keep rising because demand “seems almost insatiable.” Given his ride through multiple technology booms and busts, it’s easy to go along with the idea that there will be a giant payoff at the end of the AI rainbow.

As a billionaire with his own Hawaiian island and fighter jets, Ellison is as much of an industry giant as Oracle with its $560 billion market value. When it comes to machine learning, however, the company pales next to peers Alphabet GOOGL.O, Amazon.com AMZN.O, Microsoft MSFT.O and Meta Platforms META.O, which are worth a combined $10 trillion and investing far more in the hot technology.

At least Oracle is also selling services by putting gear into rivals’ datacenters, which could provide more bang for the buck. It should mean less spending on real estate and more on computing, but also potentially lower profitability and an erosion of control over customers and its market destiny.

Oracle’s pockets are shallower, too. Alphabet and Microsoft both spent nearly twice as much on capex in the most recent quarter. Moreover, both are operating well within their budgets. The duo could double such expenditures and still derive free cash flow.

Despite these challenges, Oracle investors support Ellison sticking with his swashbuckling ways. The stock price jumped 15% on Thursday morning and the company trades at 27 times estimated earnings over the next year, according to estimates compiled by LSEG, almost twice its average multiple over the past decade and nearly the same as Microsoft’s now. Oracle has generated a 23% annualized total shareholder return since its 1986 initial public offering, but it also has never seen anything remotely like this level of capital intensity.

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CONTEXT NEWS

Oracle said on June 12 that it generated $3.4 billion of net profit for the quarter ending May 31, a 10% increase from the same period a year earlier, on an 11% increase in revenue to $15.9 billion.

The software developer also said its capital expenditure during the three-month stretch was $9.1 billion, or more than triple the $2.8 billion from the same quarter last year.

“Capex is going to go up because the demand right now seems almost insatiable,” Chairman Larry Ellison said. “I mean I don’t know how to describe it. I’ve never seen anything remotely like it.”

(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))