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Morgan Stanley estimated a $370M to $1.3B potential risk to Oracle (NYSE:ORCL) and highlighted a near term headwind from slowing TikTok usage growth.
Oracle warned investors that a law, which could ban TikTok in the U.S. unless it is divested from its Chinese parent ByteDance (BDNCE) — may hurt its earnings. TikTok is said to be one of Oracle’s biggest customers, and its cloud infrastructure stores the app’s U.S. user data.
Following Oracle’s announcement, analysts led by Keith Weiss noted that have refreshed their view of TikTok’s Oracle Cloud Infrastructure, or OCI, revenue contribution.
TikTok’s user base has grown to 170 million monthly active users, or MAUs, as reported in March, and the analysts assume that TikTok has also netted efficiency gains on the cost per user — as economies of scale outweigh the potentially higher time spent, e-commerce, etc. — yielding $370M in implied annual cloud spend at the low end and over $1B on the high end.
The analysts noted that their view leans more towards the lower end, which would present a potential $370M annual spend on OCI (5.8% of Morgan Stanley’s estimated FY24 OCI Gen 2 revenue, 0.7% of FY24 total revenue) impact, while the high end would see about $1.27B annual spend on OCI (19.8% of Morgan Stanley’s estimated FY24 OCI Gen 2 revenue, 2.4% of FY24 total revenue).
In terms of timing, the analysts see this as more likely to be a fiscal second-half 2025 or FY26 impact should TikTok not be able to operate in the current capacity using OCI, given the current setting that the bill sets a January 2025 timeline for the divestiture to take place, but leaves room for appeals, which have the potential to delay any action.
However, Weiss and his team added that their survey surrounding TikTok usage sees usage, flat-to-down more recently, which could itself create a modest headwind to revenue growth over the near-to-medium-term that they are monitoring.
Oracle (ORCL) has an Equal-weight rating and $125 price target at Morgan Stanley.