Oracle (ORCL -4.01%) has done something few expected: it quietly crossed the trillion-dollar market cap mark, before pulling back slightly. As of the time of writing, it trades with a market cap of $877 billion.
Long seen as a legacy database company, Oracle is repositioning itself as an artificial intelligence (AI) and cloud infrastructure play. Its $455 billion backlog, OpenAI partnership, and Oracle Cloud Infrastructure (OCI) growth fueled Wall Street's enthusiasm.
But investors chasing the AI story should also pay attention to what's happening beneath the surface.
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1. Heavy capex and strained free cash flow
Oracle is pouring staggering sums into building out cloud capacity. Management outlined capital expenditures of around $35 billion in fiscal 2026 alone -- a figure that dwarfs many companies' annual R&D budgets. Oracle is betting big on becoming one of the core infrastructure providers for AI workloads.
The problem is that this spending has already started to strain free cash flow. While operating cash flow remains healthy -- it generated $20.8 billion in operating cash flow in fiscal 2025 (ended May 31, 2025) -- this figure is significantly below the expected capex of $35 billion in fiscal 2026.
Part of this shortfall will come from the growing profitability in fiscal 2026, but the remaining shortfall still has to come from somewhere else -- balance sheet cash or external funding. Moreover, such commitments suggest that the tech company may have to scale back in rewarding shareholders in terms of dividends and share buybacks.
Comparatively, Amazon and Microsoft followed a different playbook when scaling AWS and Azure. Their massive cloud spending was funded by abundant free cash flow from core businesses, giving them the ability to expand without leaning too heavily on debt.
Why it matters: Free cash flow is the lifeblood of long-term shareholder returns. Without it, Oracle may face hard choices: take on more debt, trim shareholder returns, or slow down cloud build-outs. None of those options would sit well with investors.
2. High leverage and thin liquidity
Oracle carries a debt load north of $90 billion. Total liabilities of $156 billion are more than six times the equity of $25 billion, and the current ratio sits below 1, meaning short-term obligations outweigh liquid assets.
In plain terms, Oracle is running with tight liquidity and heavy leverage -- not uncommon for mature tech companies, but risky when coupled with massive capital spending. Rising interest rates only add to the pressure, since refinancing or issuing new debt becomes more expensive.
Oracle's leveraged balance sheet makes it difficult for it to raise the additional debt capital required to fund its massive capex requirements. The silver lining is that Oracle's high market capitalization suggests that equity capital is probably still accessible.
Why it matters: In a downturn, or if rates stay elevated, Oracle's financial flexibility could shrink fast. Servicing debt and funding cloud expansion might force trade-offs, from pulling back on growth to scaling down shareholder returns. Unlike balance-sheet-light software peers, Oracle has limited room for error.
3. Execution risk in scaling cloud infrastructure
Oracle's growth targets are ambitious. Management expects OCI to grow 77% in fiscal 2026, with a glide path to more than $140 billion within a few years. These projections tie directly to Oracle's $455 billion backlog and multibillion-dollar AI contracts, including its high-profile partnership with OpenAI's Project Stargate.
But scaling global infrastructure is messy. Building data centers, securing chips, managing energy demands, and keeping uptime reliable all take enormous operational discipline. Unlike Oracle's legacy software business, cloud infrastructure tends to carry thinner margins -- at least until it reaches massive scale.
Why it matters: If Oracle misjudges demand, stumbles on execution, or faces margin pressure, backlog may not translate into the profits investors expect. That disconnect could quickly dampen market enthusiasm, leading to a rerating of its stock price.
What does it mean for investors?
Oracle crossing the trillion-dollar milestone marks a remarkable shift for a company once written off as a legacy player. The AI and cloud story is real, and its backlog offers visibility that few competitors can match.
But investors shouldn't ignore the other side of the ledger. Heavy spending, high leverage, and complex execution requirements make this transformation riskier than it appears at first glance.
Oracle may become one of AI's most important infrastructure providers. Still, investors would be wise to keep these red flags in mind before assuming the stock is a straight shot higher. The next few quarters will provide additional clues, and investors should track Oracle's performance closely.
