Why Microsoft Stock Slumped Today
Key Points
Talks between the two sides apparently broke down on a matter of security.
One of the two companies said the report was inaccurate.
Many stocks wilted during Wednesday's generally downbeat trading session. Among these was tech industry stalwart Microsoft (NASDAQ: MSFT), which fell harder than many peers on reports that a potentially beneficial deal to lease cloud capacity from a high-profile peer wasn't concluded. The company's shares declined by almost 4% as a result.
A cloudy situation
Near the end of Tuesday's trading session, Business Insider published an article stating that Microsoft's discussions with Oracle (NYSE: ORCL) about leasing some of the latter's cloud capacity had ended without agreement.
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Citing unnamed "people familiar with the matter," the site asserted that the talks fell apart on security and compliance matters.
The two companies were discussing a shift of certain Microsoft workloads to Oracle Cloud Infrastructure (OCI). However, Oracle's standard public cloud lacks a security framework known as the Federal Risk and Authorization Management Program (FedRAMP). This ensures that a cloud service has security measures sufficient for potentially sensitive government data.
According to the article's sources, Oracle was unwilling to add FedRAMP to its standard public cloud.
Microsoft has not yet commented officially on the report. An unnamed Oracle spokesperson told news agency Reuters that "the details mentioned in the article are inaccurate. Microsoft is both an OCI partner and a customer."
This individual added that "we have a tremendously collaborative and fruitful partnership, where we often talk about ways we can expand upon our ongoing work together."
The capacity crunch
This report isn't particularly surprising, as there's famously a bottleneck in capacity due to the heavy resource demands of artificial intelligence (AI). While many companies are feverishly building out capacity -- like Microsoft and Oracle, as it happens -- demand for AI compute is extremely strong, and likely to remain so.
The apparent collapse of this deal wouldn't make me bearish on either Microsoft or Oracle. However, it does illustrate a major challenge for any tech company operating in the cloud and/or hoping to expand their AI scope. Which, it turns out, is most of them.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Oracle. The Motley Fool has a disclosure policy.