Oracle (ORCL -0.64%) just did something it hasn't done in 15 years. In the third quarter of fiscal 2026 (ended Feb. 28), adjusted revenue and earnings per share both grew at least 20% year over year, driven by accelerating demand for cloud infrastructure and artificial intelligence (AI) services.
The stock rebounded sharply following the earnings report, but it still trades down more than 52% from its 52-week high. Wall Street has been concerned that higher capital spending to meet AI demand will pressure near-term cash flow, which it has. But here's why I believe 2026 could see Oracle continue to outperform expectations and potentially see its stock recover.
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AI is benefiting Oracle's entire business
Oracle is participating in a massive AI infrastructure build-out. Its cloud infrastructure revenue grew 84% year over year, while remaining performance obligations (contracted revenue that hasn't been earned yet) added another $30 billion worth of new deals in the quarter, bringing the total to $553 billion.
Oracle continues to build more data center capacity, but it is still behind the demand curve. However, management said it has drastically improved its supply chain, reducing the time from chip delivery to revenue generation by 60%. That matters because it helps close the gap between capital outlays for AI infrastructure and the cash flow those investments can produce.
Momentum is also building through what management calls the "halo effect" as new AI customers adopt additional Oracle services. Revenue from cloud applications grew 13% year over year to an annualized rate of $16 billion, or about a quarter of Oracle's business. Customers are adopting Oracle's full-stack range of services across cloud infrastructure, AI training, and software, strengthening its competitive advantage.
NYSE: ORCL
Key Data Points
Why is Oracle's stock trading down?
The stock has fallen because of higher capital spending to support AI demand. Oracle has been a strong cash flow producer for decades, but free cash flow is negative $24.7 billion on a trailing-12-month basis. AI infrastructure requires significant upfront spending on chips and data centers before revenue arrives, which is contributing to lower free cash flow in the near term.
However, Oracle's financing arrangements are more favorably designed than investors are giving it credit for. The costs of land, power, and buildings are leased, but Oracle doesn't pay the leases until the data centers are completed. Most of its capital expenditures are for equipment and are incurred very close to the time revenue is generated. This is why revenue is soaring alongside higher spending.
The payoff should be lucrative, since data centers will generate recurring revenue and cash flows from cloud customers. Analysts are modeling Oracle's operating profit to rise from $25 billion in fiscal 2025 to $46 billion by fiscal 2028. As CEO Clay Magouyrk said on the third-quarter earnings call, "Investing in AI infrastructure is capital-intensive, but our operating model is optimized to ensure profitability."
Is Oracle stock a bargain?
The stock trades at just 20 times fiscal 2027 earnings estimates (its fiscal year ends in May). That is a conservative valuation, considering analysts are calling for adjusted earnings to grow at an annualized rate of 21% over the next few years. Typically, growth stocks trading at price-to-earnings ratios equal to or lower than earnings growth are undervalued.
Oracle is outpacing its prior fiscal 2026 revenue and earnings guidance and has raised its fiscal 2027 forecast. Concerns over Oracle's capital spending are setting up a year in which it could surprise to the upside. The stock's post-earnings bounce suggests investors may be starting to view Oracle's spending more positively, given the strong demand for AI cloud services. Expectations are low, but with demand strong and the company outperforming its guidance, Oracle stock could be a smart buy after the sell-off.
