Oracle Just Showed Wall Street the AI Boom, Then Handed It The Bill
The company’s backlog of future business is staggering, but the market is focused on the equally staggering cost of building it all.
If you just glanced at Oracle’s (ORCL) earnings, you might be scratching your head. The company beat profit estimates, its cloud infrastructure business is on fire, and it revealed a backlog of future business so large it’s hard to comprehend. So why did the stock drop in pre-market trading?
Because after showing investors the AI party, Oracle also showed them the price tag. And it is a whopper. This quarter’s report confirms that Oracle’s AI demand is very real, but the market is suddenly grappling with the colossal investment required to satisfy it.
Image by JJ from Pixabay
A Backlog Beyond Belief
Let’s start with the good news, because it’s genuinely impressive. The star of the show was Oracle’s Cloud Infrastructure (IaaS) unit, which grew a blistering 93%. This is the part of the business that rents out the raw computing power needed to train and run artificial intelligence models.
That growth is feeding a monster backlog. The company’s Remaining Performance Obligations, or RPO, a measure of contracted future revenue, now stands at an almost surreal $638 billion. That figure gives Oracle immense visibility into future sales, all backed by customer contracts.
The Seventy Billion Dollar Question
Here’s where the story turns. To fulfill that mountain of contracts, Oracle has to build an unprecedented number of data centers. Fast. Management announced plans for a net cash outlay for capital expenditures of around $70 billion in the next fiscal year alone. To fund that, the company expects to raise around $40 billion in debt and equity.
This is the pivot from a high-margin software company to a capital-intensive builder of digital factories. And building factories is expensive. Management was direct about the consequences, stating that the fiscal year 2027 gross margin will “step down” as these massive projects get underway. That’s the line that gave Wall Street pause.
What To Watch Now
For an investor, the game has changed. The bull case is that Oracle is successfully capturing a once-in-a-generation shift to AI, locking in trillions of dollars of market opportunity. The counterargument is that the company is embarking on one of the biggest capital spending programs in corporate history, with all the associated risks to its balance sheet and profitability.
The debate is no longer just about cloud growth, but about return on investment. Management expects margin performance to “improve rapidly” as these new data centers come online and start generating their full contractual revenue. Your job is to watch if they’re right. Keep your eyes glued to the company’s gross margin in the coming quarters. That number, more than any other, will tell you if this colossal bet is paying off.
So, What Should You Do?
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