Oracle stock has lost 14% of its value since reporting its latest quarterly earnings after Wednesday’s market close, according to the Wall Street Journal.
Shares of the Austin, Texas-based database provider have lost a whopping 44% of their value since peaking Sept. 10 when I wrote in Forbes about Oracle’s fiscal-first quarter earnings.
Oracle stock rose 54% that day after reporting a much higher than expected $455 billion contract backlog. However, investors have become less sanguine about the company’s prospects “on concerns about the level of risk Oracle is taking in its build-out,” noted the above linked Journal report.
This raises a simple question:
Does $ORCL’s Drop Make The Stock A Bargain?
If Oracle realizes the optimistic projections of eight-fold growth over the next four years which Oracle’s executive vice chair and former CEO Safra Catz issued in Sept., as I wrote in my Forbes post, this drop could be an opportunity.
However, here are two reasons to be skeptical of a big increase in Oracle stock:
- Mixed fiscal second quarter results and guidance.
- High financial and business risk.
Oracle is excited about its future.”AI Training and selling AI Models are very big businesses,” said Oracle CEO Mike Sicilia in a statement. “But we think there is an even larger opportunity — embedding AI in a variety of different products. All of the top five AI Models are in the Oracle Cloud. We have huge advantages over our applications competitors,” Sicilia added.
Oracle stock has meaningful downside risk. The company’s rising debt, negative free cash flow, credit rating pressure, customer concentration, and high valuation premium relative to peers make $ORCL a risky bet.
Fiscal 2026 Second Quarter Performance And Prospects Disappoint
Oracle’s latest financial report extending investors’ timeline for when the cloud-computing provider will generate a return on its AI build out. The company fell slightly short of analysts’ expectations for revenue and operating income while raising its spending forecast, noted the above-linked Journal article.
Here are the key numbers:
- Fiscal 2026 second quarter revenue: $16.06 billion – up 14% and $150 million below the London Stock Exchange Group consensus, according to CNBC.
- FY 26 Q2 cloud revenue: $7.98 billion – up 34% and $60 million more than Street Account estimates, noted CNBC.
- FY 26 Q2 cloud infrastructure revenue: $4.1 billion – a 68% increase and “slightly lower than analyst expectations,” noted the above-linked Journal report.
- FY 26 Q2 remaining performance obligations: $523 billion – a 438% increase and about $21 billion more than the StreetAccount consensus, according to CNBC.
- FY 26 Q2 free cash flow: negative $10 billion – almost twice the StreetAccount consensus, per CNBC.
- FY 26 capital expenditures forecast: $50 billion – up 136% and $15 billion more than the September estimate, Oracle principal financial officer Doug Kehring said in the above-linked release.
Oracle expressed pride in its cloud services. “Oracle is very good at building and running high-performance and cost-efficient cloud datacenters,” said Oracle CEO Clay Magouyrk in the previously-linked statement.
“For years Oracle has been investing in AI and building autonomous cloud software. Oracle’s Autonomous Database and Autonomous Linux have been key to reducing human labor and human error in our datacenters. Because our datacenters are highly automated, we can build and run more of them,” Magouyrk added.
Oracle’s Elevated Business And Financial Risk
Oracle stock has meaningful downside risk. The company’s more than $93 billion in debt, negative free cash flow, credit rating pressure, customer concentration, and 56% valuation premium relative to peers make $ORCL a shaky bet.
Rising Debt Repayment Risk
Oracle’s debt level has increased significantly in the last five years. Specifically, the company’s total debt has risen about 33% since 2020 to more than $93 billion, according to Stock Analysis on Net.
Oracle’s key leverage ratios have deteriorated. For example, the company’s debt-to-equity ratio is 3.78 times, noted Simply Wall Street; its ratio of debt to earnings before interest, taxes, depreciation, and amortization is higher than 400%, noted Moody’s per Investing.com; and the company’s interest coverage of between five and six is adequate but declining, according to Stock Analysis on Net.
Credit Rating Pressure
Oracle debt is now two notches above speculative grade, reported Finimize. with all major ratings agencies citing Oracle’s high debt-t0-EBITDA as a key downgrade trigger. Moreover, all three major rating agencies have shared their concerns about Oracle’s elevated risk.
Moody’s is concerned about the $300 billion concentration risk from Open AI; S&P highlighted the risk of capital expenditures straining cash flow and the rising debt-to-equity ratio; and Fitch forecasts negative pre-dividend free cash flow exceeding $11 billion in both the current and next fiscal year, according to AInvest.
Customer Concentration
Oracle is very dependent on a small number of AI cloud services customers. Some, such as Meta and Nvidia, are profitable; while others – notably OpenAI and xAI – are not.
OpenAI is expected to burn a huge amount of cash in the next five years. OpenAI has projected a total cash burn of approximately $115 billion between 2025 and the end of 2029, while independent analysts estimate potential operating losses could be as high $500 billion by 2030, according to The Economic Times.
xAI is expected to burn through $13 billion in cash in 2025 and become profitable in 2027, reported MSN.
Premium Valuation
Oracle stock trades at a 56% premium to cloud peers – Microsoft, Amazon, Alphabet, Salesforce, SAP, IBM – on a price/earnings ratio basis, noted Stock Analysis. This valuation factors in growth that has yet to materialize in revenue results.
What Analysts Are Saying
Analysts are concerned about Oracle’s ability to finance its build out. “Ultimately, it comes down to ‘how is Oracle going to raise the money?’ ” RBC Capital Markets analyst Rishi Jaluria told the Journal. “It’s one thing to build a backlog, but having that backlog translate to revenue shows ability to actually meet those demands.”
Oracle is competing with much better financed rivals – fanning investor fears about how slowly AI outlays are turning into profits. “Markets quickly looked past the massive earnings beat, driven by a one-off asset sale, and focused on the rising capex and weak cash flows,” Hargreaves Lansdown analyst Matt Britzman told Reuters.
In September, Oracle envisioned very fast growth in its cloud infrastructure business. “We expect Oracle Cloud Infrastructure revenue to grow 77% to $18 billion this fiscal year — and then increase to $32 billion, $73 billion, $114 billion, and $144 billion over the subsequent four years,” Catz said, according to my Forbes post.
Even if she turns out to be right, there is no rush to catch this falling knife.
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