Oracle’s Cloud Ambitions Face a Financial Reality Check

Oracle Corporation finds itself navigating turbulent financial waters. Since reaching a peak last September, the company's market valuation has been nearly halved. The pressure intensified recently with news that a major $10 billion infrastructure project has lost a key financial backer, raising fundamental questions about how the cloud and AI giant will fund its aggressive expansion strategy.

A deep dive into Oracle's financials reveals the core of Wall Street's growing apprehension. The company's total debt load has ballooned, increasing from $92.6 billion in May to $108.1 billion. This surge coincides with a deeply negative free cash flow of minus $10 billion reported in the most recent quarter.

Despite this strained balance sheet, management has dramatically revised its capital expenditure (CapEx) forecast upward for the current fiscal year, from $35 billion to $50 billion. Investment spending in the last quarter alone hit $12 billion, triple the amount from the same period a year prior. To fuel this capital hunger, Oracle took on $18 billion in new debt during September.

A Major Setback in Infrastructure Expansion

Compounding these concerns is a significant setback in Oracle's data center build-out. Asset manager Blue Owl Capital has reportedly withdrawn from a planned $10 billion data center project, with unfavorable debt conditions cited as the primary reason. This development strikes at a vulnerable time, fueling analyst fears that Oracle may have underestimated the capital required to execute its ambitious artificial intelligence roadmap.

While company leadership has denied rumors of delays in constructing data centers for OpenAI, investor sentiment remains fragile. The stock currently trades at €155.86, sitting approximately 45% below its 52-week high recorded in September.

Should investors sell immediately? Or is it worth buying Oracle?

Record Backlogs Present a Double-Edged Sword

On the surface, demand appears unprecedented. Oracle's remaining performance obligations (RPO)—representing contracted future revenue—skyrocketed by 438% to $523 billion. This explosion was driven by major agreements with Meta, Nvidia, and a landmark $300 billion partnership with OpenAI.

However, this very success introduces a new risk profile. The enormous reliance on OpenAI creates a concerning concentration risk. Given that OpenAI itself is not yet profitable and faces intense competition from rivals like Alphabet's Gemini, a significant portion of Oracle's revenue projection is tied to the financial health of a single, albeit large, client.

Disappointing Guidance Triggers Sell-Off

Recent quarterly earnings failed to restore confidence. Although earnings per share showed growth, overall revenue missed market expectations. The outlook for the third quarter proved particularly disappointing, with management's growth projection falling short of analyst estimates. This guidance triggered the latest wave of selling, which also briefly weighed on other AI-focused stocks.

With a price-to-earnings ratio now around 26, the equity's valuation has contracted significantly. The coming quarters will be critical. Oracle must demonstrate it can convert its massive order backlog into tangible cash flow with sufficient speed, before rising capital costs evolve from a challenge into a serious burden.