The past 12 months have been a wild ride for Oracle (ORCL +3.13%). Its stock reached record highs almost a year ago as it announced a $300 billion, multiyear deal with OpenAI that dramatically increased its backlog.
However, the optimism from that deal quickly faded as investors became more aware of OpenAI's financial struggles, prompting questions about whether it could meet the financial obligations of its deal with Oracle.
Long-term investors might willingly take a chance on Oracle stock if they see prospects for market-beating gains over the next five years. But will that happen?
Image source: The Motley Fool.
The state of Oracle today
Oracle's prospects for beating the market over the next five years probably rest on its AI investments. As a company, Oracle has worked to expand its cloud computing capacity while mitigating concerns about how reliant it is on OpenAI being able to fulfill its commitments.
Since last September, its backlog has risen from $455 billion to $638 billion, an increase equal to 61% of the size of its OpenAI deal. Unfortunately, that has failed to ease investors' worries. Despite its recent rally, Oracle is still down about 57% from its peak almost a year ago.
NYSE: ORCL
Key Data Points
This is likely because its total debt stood at $129.5 billion as of May 31, the end of its fiscal 2026. That was up from about $92.6 billion a year prior, and is a huge burden for a company with only about $43.1 billion in book value. It is also less than its $55.7 billion in capital expenditures over the last year, an investment that it had to make in order to build the AI infrastructure to meet this demand.
Fortunately, the news is not all bleak. Revenue rose by 17% in fiscal 2026, including a 39% increase for its cloud segment. That also means the cloud segment has overtaken the software segment as the largest source of revenue, marking a key change in Oracle's transition into an AI cloud player.
Additionally, book value more than doubled from just under $21 billion one year ago to $43.1 billion. Such improvements are a strong indication that its AI investments are paying off quickly. Also, its 25 P/E ratio is slightly below the S&P 500's average of 30, which gives Oracle stock ample room to rise if it can win back investor confidence.
Oracle in five years
Assuming Oracle can continue driving significant returns from its AI investments, the cloud stock should beat the market over the next five years.
Admittedly, the loss of OpenAI as a client would deal Oracle a considerable blow. Also, if other customers were unable to pay Oracle for the compute capacity they've committed to, the company's high debt levels could put it in a precarious financial position.
Fortunately, its AI investments seem to drive returns rapidly. Moreover, the relatively rapid growth of its backlog could mitigate the damage if OpenAI could not fully live up to its end of the agreement.
Hence, while investors should avoid Oracle if they lack patience or feel its debt load is too risky, its popularity with AI customers should hold the company and its investors in good stead as it works to win back investor confidence.
