Oracle (ORCL 1.95%) nearly became a $1 trillion company last fall after announcing a massive new contract with OpenAI to use its Oracle Cloud Infrastructure service. But investors have pulled back on their excitement for the stock since then, cutting the stock price in half from its all-time high reached in late September.
That sell-off accelerated this year amid the shift away from any company remotely related to software, as fears that artificial intelligence (AI) will render many enterprise software packages obsolete have led to a rerating of their earnings. However, the future of Oracle rests solidly on its cloud computing business, and management is investing heavily to meet the opportunity.
Does this pullback present an incredible buying opportunity? Or should you look at other AI stocks, instead?
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The stock definitely looks cheap right now
Oracle is one of just a handful of hyperscalers providing cloud computing infrastructure to compute-hungry AI developers. In fact, its late arrival to the cloud computing opportunity put it in a great position to offer purpose-built infrastructure for AI training and inference. As such, analysts expect it to produce earnings growth of 22% for fiscal 2026.
After the sell-off, the stock trades at just 22 times analysts' forward earnings estimates. That makes the stock look cheap relative to its expected earnings growth and compared to its larger cloud computing peers. Microsoft, Amazon, and Alphabet all sport forward price-to-earnings ratios (P/Es) between 24 and 27, as of this writing. What's more, analysts expect slower earnings growth from Amazon and Alphabet this year.
Oracle's earnings growth is supported by its massive backlog of cloud contracts. As of the end of its second quarter, Oracle held $523 billion in remaining performance obligations. Only Microsoft sports a greater backlog of $625 billion in contracts, but a large portion of that comes from its enterprise software packages. Amazon and Alphabet each had around $240 billion in backlogs, as of their most recent updates.
But before investors start piling into the stock, there are some significant risks to consider.
Does Oracle stock deserve a discount?
The more uncertainty there is about a company's earnings potential, the greater the discount investors should require to invest in its stock. Such might be the case here. Oracle stands in contrast to its bigger cloud computing competitors. Its $22.3 billion in cash from operations over the trailing 12 months is absolutely dwarfed by Amazon, Microsoft, and Alphabet. The tech giants produced operating cash flow between $139 billion and $165 billion in calendar 2025.
As a result, Oracle is set to burn tens of billions in cash this year to build out its cloud computing infrastructure. That's not a challenge unique to Oracle, though. Many analysts expect Amazon to produce negative free cash flow this year as it spends $200 billion on Amazon Web Services (AWS).
However, Amazon has a massive e-commerce business in addition to its cloud computing business, which mitigates its risk. It also has a very strong balance sheet and a successful history of pulling forward capital expenditures with strong long-term returns on invested capital for both AWS and its retail operations.
NYSE: ORCL
Key Data Points
Oracle is raising significant debt for its buildout. Leverage always amplifies risk, which is compounded by the fact that it's heavily reliant on its OpenAI contract to produce positive returns on its invested capital. Not only does the $300 billion contract represent nearly 60% of Oracle's backlog, but it also won't start until 2027 and runs through 2031. But Oracle has to start building now to earn that contracted revenue later.
A lot can happen over the next six-plus years. OpenAI could falter, fall short of its revenue expectations, and find itself unable to meet its end of the bargain with Oracle. That's a bigger problem for Oracle than for the larger hyperscalers because Oracle doesn't have a backstop.
It may have to cut pricing to sell excess capacity. By comparison, Amazon, Microsoft, and Alphabet can all use excess capacity themselves with their own AI development and other operations. That's another key risk facing the stock.
Given the uncertainty baked into Oracle's earnings projections, it deserves to trade at a lower earnings multiple than the larger hyperscalers. If it's able to execute (and OpenAI executes, as well), it could achieve strong earnings growth. But other AI stocks look more appealing right now, even at slightly higher prices, given their lower risk profiles.
