Oracle's earnings report flashes warning sign for tech sector as equity investments take a hit

Published Fri, Mar 11 20227:53 AM ESTUpdated Fri, Mar 11 20228:54 AM EST

Oracle's earnings report Thursday showed the database software company's business is holding up OK despite global unrest and challenges in the economy. Revenue was in line with estimates, and the forecast was roughly what analysts were expecting. But for investors focused on the tech sector, there was a particularly ominous number in the report. Oracle said investments in two companies — Oxford Nanopore and Ampere Computing — pulled down profit in the fiscal third quarter by about 5 cents a share. Adjusted earnings came in at $1.13 per share, trailing the average analyst estimate of $1.18, according to Refinitiv. Oracle didn't cite any particular issues with those two companies. Oxford Nanopore develops gene-sequencing technology, and Ampere is a privately held provider of server chips. Rather, according to Oracle CEO Safra Catz , the investment hit was "primarily due to share price declines of equity investments impacted by the widespread downturn in equity markets last quarter." That's likely to become a common refrain when earnings reports hit in a big way later next month. Across the tech hubs of Silicon Valley and the Seattle area, the industry's biggest companies have used part of their swelling cash piles to invest in other emerging businesses. During the raging bull market, highlighted by blockbuster IPOs in recent years, those bets paid off in spades, providing an earnings cushion and a cash windfall for the companies that sold high. The story has changed dramatically since late last year. The Nasdaq Composite is 18% off its record in November, and many of the companies that soared during the pandemic have lost 75% or more of their value from their 2021 highs. To see how much pain there is to go around, look no further than another company that published results Thursday at the same time as Oracle's report. Electric-vehicle company Rivian , which went public in November , missed fourth-quarter estimates and said that, due to supply chain challenges, it expects to produce 25,000 electric trucks and SUVs this year, half of its prior forecast. The stock sank 13% in extended trading Thursday. Based on that decline, it's now down 65% for the year. That's a problem for Amazon . Prior to Rivian's IPO, Amazon invested a total of more than $1.3 billion into the company and owned about one-fifth of the equity at the time of the offering. In February, Amazon reported a gain on the Rivian investment of $12 billion, as the stock shot up after its IPO. In its annual report , Amazon said Rivian accounted for most of its $20.3 billion in equity investments. Now Amazon's total stake in Rivian is worth closer to $5.7 billion. What gets marked up must also get marked down. Investments are "recorded at fair value, which is subject to market price volatility," Amazon said in its 10-K. "We record our equity warrant investments in private companies at fair value and adjust our equity investments in private companies for observable price changes or impairments." In other words, one of the ways it values private investments is by what's happening to comparable stocks in the public market. Amazon has some investments in pricey private companies, such as cloud analytics vendor Databricks ($38 billion valuation) and OpenAI (valuation undisclosed), the artificial intelligence lab co-founded by Elon Musk , Sam Altman and others. Microsoft is also an investor in those two companies, which are both in areas that have been hammered by the public markets. And in January 2021, Microsoft joined General Motors , Honda Motor and others as part of an investment in self-driving car company Cruise at a $30 billion valuation . The other big corporate tech investors to watch are Salesforce and Alphabet . Salesforce has become a powerhouse in late-stage venture capital in the past half-decade through its Salesforce Ventures arm. For fiscal 2021, the cloud software company reported a $2.17 billion annual gain from its investments after Snowflake and nCino jumped in their public market debuts. In fiscal 2022, which ended Jan. 31, the investment gain was $1.2 billion. Salesforce has sold off significant positions in some companies, locking in gains. But there are some big drops in the value of its current holdings. For example, Salesforce invested $150 million in Robinhood's IPO last year. That was at $38 a share. The stock is now trading at $12.05. The value in Salesforce's stake in software company Monday.com , which went public in June , has dropped from about $149 million at the end of 2021 to $63 million today. Video-conferencing provider Zoom made the same bet on Monday.com's IPO. Alphabet, through its two primary investment vehicles, owns hundreds of millions of dollars in shares of UiPath , Freshworks , Lyft and Duolingo , which are down between 11% and 35% to start the year. Those are just the public investments. CapitalG, the late-stage arm, has exposure to Databricks, fintech company Stripe and other pre-IPO names, while GV, formerly Google Ventures, has an expansive portfolio of companies that are at various stages of maturity. As tech earnings season approaches, accountants will be busy determining the right mark-to-market values on those assets. Investors, meanwhile, will see what the first bear market for the industry in over a decade means to the profitability of their top holdings. — CNBC's Jordan Novet contributed to this report. WATCH: Trading the very latest on Rivian's results

A safety sign is posted in front of Oracle headquarters on December 09, 2021 in Redwood Shores, California.

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But for investors focused on the tech sector, there was a particularly ominous number in the report.