Oracle (NYSE: ORCL) initially saw its shares rise after reporting its latest quarterly results, but most of those gains faded within days. The market’s focus has shifted beyond the size of the company’s artificial-intelligence cloud backlog to a more difficult question: who will fund the new data centers, at what cost, and will Oracle’s largest customer, OpenAI, use the contracted capacity on schedule?
Oracle is financing a major data-center build-out with debt as the 10-year U.S. Treasury yield has moved above 5% for the first time since 2007. At the same time, OpenAI, which represents roughly half of Oracle’s backlog, has begun discussing a slower pace of frontier-model development. Over the next several weeks, OpenAI’s developer conference on September 29, Oracle’s AI World event and analyst meeting in late October, and the Federal Reserve’s possible decision to raise rates again this year could all influence how investors assess the spending program.
Backlog reaches $664 billion
The first point of emphasis for Oracle’s bullish investors is its backlog. The company added more than $30 billion in AI cloud contracts during the first quarter, lifting remaining performance obligations to $664 billion, up $20.9 billion from a year earlier. Management said the vast majority of the new contracts include customer prepayments or hardware supplied by customers, meaning Oracle will not have to fund all of the associated capital expenditure itself.
That distinction has a direct impact on cash flow. Oracle’s capital expenditure reached $28.5 billion in the quarter, with about $11.4 billion covered by customer prepayments. Free cash flow came to negative $5.4 billion, better than the negative $9.6 billion expected by the market. Customers absorbing part of the hardware and construction costs temporarily reduces the pressure on Oracle’s own balance sheet, but it does not eliminate the need for financing as the build-out continues.
Oracle’s delivery capacity also improved. The company added 850 megawatts of data-center capacity during the quarter and delivered more than 300,000 GPUs, nearly three times the previous quarter’s volume. Overall GPU utilization was close to 98%. Cloud infrastructure revenue rose 121% year over year to $7.4 billion. Management expects total revenue of at least $90 billion for the current fiscal year and forecasts second-quarter revenue growth of 30% to 34%.
Despite the rapid expansion of its data-center footprint, Oracle maintained a non-GAAP operating margin of 42%, even as its gross margin declined. Lower operating costs temporarily offset the additional expenses associated with bringing new data centers online.
AI World will test Oracle’s targets
Oracle AI World is scheduled to take place in Las Vegas from October 25 to 28, with the company’s financial analyst meeting set for October 28. Investors will be watching for any increase in Oracle’s long-term revenue or earnings targets. First-quarter results were well above the company’s earlier guidance, leaving some investors to view its existing long-term targets as conservative.
Oracle also plans to showcase new products, including the Oracle AI Data Platform. The platform can automatically build enterprise ontologies to help AI agents process and reason over private business data. The company is also expected to present an agent-enabled healthcare management system.
The products are particularly important for Oracle’s software business. Software-as-a-service revenue grew only 10% in the first quarter, leaving the company’s traditional SaaS operations in need of additional sources of growth.
On the capital-structure side, Larry Ellison recently canceled a plan to sell as many as 50 million Oracle shares, worth about $7.5 billion at the time. Management considers fiscal 2027 and fiscal 2028 to be the peak years for capital expenditure. That implies a timetable for free cash flow to improve, but the company has not specified when it expects cash flow to turn positive.
OpenAI remains the key concentration risk
The main debate surrounding Oracle’s backlog centers on OpenAI. S&P Global downgraded Oracle to BBB- in July, just one notch above non-investment-grade status, and identified OpenAI as a key credit risk because the customer accounts for roughly half of Oracle’s backlog. S&P also expects Oracle’s free-cash-flow shortfall to widen to about $42 billion in the company’s current fiscal year.
OpenAI Chief Executive Sam Altman ruled out the possibility of an initial public offering in 2026 last week. At the same time, the market began discussing whether OpenAI might slow development of its most advanced models. Altman later clarified that the company was referring to an adjustment in development pace rather than a halt to AI research.
For Oracle, however, a delay by its largest customer could affect liquidity, while a slower research schedule could alter expectations for how quickly contracted orders become revenue. OpenAI’s September 29 developer conference will therefore be an important checkpoint for assessing future demand for Oracle’s computing capacity.
Debt and spending weigh on cash flow
Financing costs represent another source of pressure. The Federal Reserve recently raised rates again and adopted a more restrictive policy stance, while its rate projections indicated that another increase could come this year. Such moves may have a limited effect on large technology companies with substantial cash reserves, but Oracle no longer fits that profile.
As of July, Oracle had approximately $117 billion in debt. Its 10-year bond yield was around 6.5% at the time, putting its borrowing costs closer to those of high-yield issuers than to companies with similar investment-grade ratings. Oracle credit-default swaps have also become one of the instruments used by the market to hedge the risks associated with its AI capital-spending program.
The company completed a marketed $20 billion equity offering during the first quarter, easing some financing pressure but diluting existing shareholders. Further data-center construction will still have to be funded in a market where borrowing costs are high.
Capital expenditure and margins are moving in an unfavorable direction in the near term. Oracle’s non-GAAP gross margin was close to 69% a year earlier but fell to 61% in the first quarter, mainly because newly opened data centers remain in their ramp-up phase. Given the current scale of spending, it is still unclear how quickly the margin pressure can ease.
First-quarter capital expenditure of $28.5 billion was more than three times the year-earlier level. Chief Financial Officer Safra Catz confirmed that Oracle’s full-year capital-spending plan of $90 billion to $95 billion remains unchanged, but management has not said when free cash flow will turn positive.
Oracle also added $700 million in restructuring charges, bringing the total restructuring program to approximately $2.8 billion. Shares fell nearly 4% after the company announced another round of layoffs on Monday.
Oracle has cut its workforce by 13% over the past year to free up funds for GPU purchases. The financial benefit of that plan depends on whether backlog converts into revenue on schedule. If customer deployments take longer than expected, depreciation on hardware that has already been purchased will continue to flow through the income statement. After the results, BMO and Royal Bank of Canada both lowered their price targets, with margins among the reasons for the revisions.
Valuation model points to limited room at current price
A cash-flow valuation model for Oracle’s shares relies on several assumptions. It projects fiscal 2027 revenue growth of 35%, broadly consistent with management’s guidance for at least $90 billion in revenue and with overall market expectations. Growth peaks at 50% in fiscal 2028 as more contracted orders are expected to convert into revenue, then declines by roughly 10 percentage points each year to 20% in fiscal 2031.
The model uses an EBIT margin of 35%, slightly above the 33.2% recorded in fiscal 2026, because Oracle’s margin over the past 12 months has already exceeded the fiscal 2026 level. The tax rate is based on the average of the past two years.
For capital expenditure, the model uses the lower end of management’s full-year guidance, assuming $90 billion in fiscal 2027. After that year, capital expenditure gradually falls as a share of revenue, although the absolute amount is still expected to rise through fiscal 2030. Demand for computing capacity will not disappear immediately, and new chips will require continued deployment. As a result, the model’s depreciation and amortization expense is materially higher than in any previous full fiscal year for Oracle. GPUs have limited useful lives on the balance sheet, and newer generations could replace existing chips within several years.
The model applies a weighted average cost of capital of 9.5% and a terminal growth rate of 3%. It produces an estimated fair value of approximately $152 per Oracle share, close to the market price at the time. At that level, the growth opportunity represented by the backlog is broadly offset by debt, capital expenditure, customer concentration and margin pressure.
Over the next six weeks, investors will monitor OpenAI’s developer conference, Oracle’s analyst meeting and the Federal Reserve’s rate decision. For Oracle shareholders, the central issues remain the pace at which the $664 billion backlog converts into revenue, OpenAI’s actual demand for computing capacity, and whether the company can keep debt and cash flow under control during the capital-spending peak.