The sentiment around Oracle (ORCL 2.43%) stock has not been favorable lately. After a stunning surge in the first nine months of the year, shares of the cloud computing and database services provider have witnessed a steep sell-off thanks to mounting concerns about the company's heavy spending on building artificial intelligence (AI) infrastructure, which is inflating its debt.
Oracle stock has shed 42% of its value since hitting a 52-week high on Sept. 10. Shares of the company saw another steep pullback after the release of its fiscal 2026 second-quarter results (for the three months ended Nov. 30) on Dec. 10. Let's see why investors have lost confidence in Oracle stock.
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Oracle's aggressive spending has spooked investors
Oracle's fiscal Q2 revenue increased by just 14% year over year to $16.1 billion, missing the consensus estimate of $16.2 billion. Its non-GAAP earnings shot up by 54% year over year to $2.26 per share, driven by a $2.7 billion pre-tax gain from the sale of its stake in chip designer Ampere earlier this year. Additionally, Oracle stuck to its $67 billion revenue forecast for the current fiscal year, which may have raised questions about the company's ability to convert its massive backlog into revenue.
NYSE: ORCL
Key Data Points
Meanwhile, Oracle's heavy borrowing to fund its rapid capex expansion is another cause for concern. The company's free cash flow was a negative $10 billion last quarter. It has been burning cash for three quarters on the trot. Oracle's capex jumped by 3 times year over year in the previous quarter to $12 billion. It anticipates shelling out $50 billion in capital expenses this year, which is significantly higher than the $35 billion Wall Street estimate.
Oracle is borrowing heavily to fund its spending. Its debt ballooned to $124 billion (including operating lease liabilities) by the end of the previous quarter, an increase of 39% from the year-ago period. Of course, the company has a tremendous revenue backlog to fulfill, driven mainly by its $300 billion contract with OpenAI that will kick off in 2027 and will run for five years. Still, it is easy to see why investors aren't convinced about Oracle spending so much to meet its backlog.
After all, OpenAI has been burning through cash. HSBC expects the AI specialist to remain free cash flow negative over the next five years, pointing out that it would need to raise $207 billion through debt, equity offerings, or by rapidly increasing its revenue. The good part is that OpenAI's top line is expected to grow from an estimated $35 billion in 2026 to $213 billion in 2030, according to HSBC. That's not surprising, as the company has a massive base of 800 million weekly users for its popular chatbot ChatGPT that it can monetize.
Moreover, its enterprise business has been growing at a nice clip because of the productivity gains that AI is helping businesses achieve. Just last month, OpenAI pointed out that the number of ChatGPT Enterprise seats has jumped by a whopping 9 times year over year. As such, don't be surprised to see OpenAI actually finding the money that it needs to pay Oracle from 2027 onward and actually fulfill its commitments in the long run.
Also, investors should note that market research firm IDC estimates that every dollar of spending on AI services by businesses is likely to generate $4.60 in value. As a result, AI infrastructure spending is likely to attract more funding in the future, and that's why it won't be surprising to see Oracle actually converting its backlog into revenue in the long run.
Why the stock seems poised for a comeback in 2026
Oracle's remaining performance obligations (RPO) stood at $523 billion last quarter, up by 438% from the year-ago period. The company attributed this massive jump in the total value of its unfulfilled contracts to the new commitments it received from the likes of Meta Platforms, Nvidia, and others.
This huge figure is the reason why Oracle has been focused on aggressively bringing more capacity online. CEO Clay Magouyrk remarked on the latest earnings call that the company currently serves more than 700 AI customers on the Oracle Cloud Infrastructure (OCI) platform. These include a "vast majority of the large model providers" who spend the additional AI data center capacity that Oracle gives them in a span of just two to three days.
This explains why Oracle has raised its fiscal 2027 (which will end on May 31, 2027) revenue guidance by $4 billion to $89 billion. So, the company's top-line growth is on track to accelerate to 33% next year, double the revenue jump it is on track to deliver in the current fiscal year. Moreover, Oracle's recent sell-off has made the stock affordable.
It is now trading at 9 times sales, almost in line with the U.S. technology sector's average sales multiple. The potential acceleration in its sales growth from next year means that investors are getting a good deal on Oracle stock right now. Assuming it maintains its price-to-sales ratio at the end of fiscal 2027 and achieves $89 billion in revenue, its market cap could hit $801 billion.
That suggests a potential jump of 48% from current levels over the next year and a half. As such, this AI stock could overcome the recent negativity surrounding it and surprise investors in the new year with a significantly improved performance in the market.
