AI Infrastructure Collapse: Oracle Plunges 17% in Three Days - Is the Market Overreacting?

Oracle Corp. reported seemingly robust second-quarter results, with total revenue up 14% year-on-year and net profit soaring 95%. Cloud business revenue, specifically, accounted for 50% of the total for the first time, and remaining performance obligations (RPO) surged 438% year-on-year to $523 billion. These figures, however, masked underlying concerns: both cloud business revenue and total revenue fell short of market expectations for Q2. Furthermore, quarterly capital expenditure increased 41% quarter-on-quarter, with projected spending for fiscal year 2026 now $15 billion higher than initially planned. Consequently, quarterly free cash flow (FCF) reached a negative $10 billion.

While some of the earnings report data appeared optimistic, it doesn't fully withstand market scrutiny. The surge in remaining performance obligations, for instance, does indicate substantial market demand for Oracle's cloud services; however, these paper agreements do not quickly translate into actual revenue, offering no immediate boost to short-term cash flow. Public data reveals that of Oracle's $523 billion in RPO, only about 10% is expected to convert into recognized revenue within one year. The remainder consists of long-term orders for 2027 and beyond. Additionally, it remains uncertain whether Oracle's production capacity can adequately meet the demand from these massive orders.

In fact, market skepticism towards Oracle is not a new phenomenon. Earlier this year, when the company secured a colossal $300 billion contract with OpenAI, questions arose regarding Oracle's ability to truly deliver on such an ambitious project, given its annual revenue of $60 billion and cash flow of $20 billion. The managing director of U.S. asset management firm AmontPartners commented that this move aligns perfectly with founder Larry Ellison's penchant for grand pronouncements.

While aggressively securing orders, Oracle is also pursuing an aggressive AI expansion strategy. In September, Oracle issued approximately $18 billion in new debt, pushing its total outstanding debt beyond $100 billion. This makes it the most indebted among major tech companies. Oracle's current credit rating is BBB, and its Credit Default Swap (CDS) levels have reached 144 basis points, approaching those of some junk bonds. Consequently, the market believes the likelihood of Oracle defaulting on its debt has significantly increased.

Despite a disappointing earnings report, JPMorgan credit analyst Erica Spear noted that while overall results largely met expectations, growth in demand and orders remains remarkable.

Bank of America analyst Brad Sills emphasized that investors should return to fundamentals, reiterating a "Buy" rating on Oracle with a lofty $300 price target. He explained that part of the sharp decline stems from Oracle entering the most intensive phase of AI infrastructure investment, a point reflected in the company's capital expenditure forecasts. This has led market enthusiasm to be "deterred" by current heavy investments and negative cash flow, ahead of future revenue materialization.

Sills stated that Oracle's large-scale data center construction is largely on track. Furthermore, Oracle possesses multiple advantages, including a more resilient cloud architecture and strong heterogeneous compatibility, which can cater to diverse computing scenarios, thus ensuring long-term competitiveness.

Regarding the current situation, Spear believes the earnings report shows no significant red flags. However, she noted that the overall performance and management's statements were insufficient to boost confidence in the company's credit. Without explosive growth to validate its revenue or profitability, Spear suggested Oracle consider accepting a BBB credit rating, or cutting dividends, clarifying debt leverage, or pursuing equity financing.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.