Oracle may have eased fears over AI spending with earnings beat

At the end of last year, Oracle Corporation (ORCL) began to draw intense scrutiny over its massive spending on AI infrastructure and its mounting debt load.

Oracle said in an earnings call in December that its capex is expected to reach $50 billion for the fiscal year ending in May 2026, which was $15 billion higher than it had projected in September.

Although the software giant reported that cloud sales had increased 34% to $7.98 billion and revenue in its infrastructure gained 68% to $4.08 billion during its fiscal year (FY) second quarter, it fell slightly below analyst expectations.

By the end of last year, Oracle's stock had dropped 40% from its peak in September, wiping out roughly $360 billion from its market cap. It lost about $67 billion in just one day in December.

“Oracle faces its own mounting scrutiny over a debt-fueled data center build-out and concentration risk amid questions over the outcome of AI spending uncertainty,” Jacob Bourne, an analyst at Emarketer, told Bloomberg.

Oracle appears to have eased a lot of the concerns Wall Street was starting to have with its business model with a big FY third-quarter earnings beat on Tuesday.

The company's adjusted earnings-per-share came in at $1.79, ahead of the consensus estimate of $1.70, and up from last year's $1.47. Its Q2 revenue was $17.2 billion, beating Wall Street's expectation of $16.9 billion, and up 22% on the year.

Oracle's cloud business jumped 44% from a year ago, to $8.9 billion. The company pivoted toward offering cloud computing services several years ago, and its cloud segment now makes up over half of the company's sales.

Its Cloud Infrastructure business, where it rents out servers over the internet, was the main driver for the cloud segment's growth, surging 84% to $4.9 billion.

Oracle raises its 2027 revenue outlook

Oracle also raised its sales forecast for its fiscal 2027, which begins in June, to $90 billion, which would deliver 34% annual growth.

"The past few months were a lot tougher as investors worried about what all could go wrong in terms of customer concentration, ability to finance the necessary capital expenditures, management's ability to deliver on these contracts, the gross margin profile of these contracts, etc.," Barclays analyst Raimo Lenschow wrote in a client note late Tuesday.

"We do understand that investors need to ask all these questions but we also have to acknowledge that we are getting more and more answers."

Shares of ORCL gained over 9% on Wednesday.

Oracle's backlog grew by $29 billion to $553 billion. Roughly $300 billion of that is from a multi-year contract with OpenAI.

Mizuho analyst Siti Panigrahi reiterated an Outperform rating on ORCL shares, while saying in a client note that the company's earnings beat shows that "Oracle's capacity ramp is converting backlog into revenue at the pace needed to hit FY26 cloud growth targets, which should increase investor confidence."

Panigrahi added that with its operational margins coming in at 42.9%, ahead of the consensus estimate of 42.7%, it is "showing Oracle can scale its AI infrastructure while maintaining profitability."

Despite Oracle's growth in its cloud business, its $19 billion in AI data center capital expenditures added $27 billion in new debt.

Meanwhile, as software stocks have been pummeled over fears that AI could disrupt the core business of many software-as-a-service (SaaS) companies, Oracle CEO Mike Sicilia tried to put those fears to rest during the company's earnings call.

“I do think that AI tools and their coding capabilities would be a threat if we weren't adopting them, but we are, and very rapidly,” he said. “Oracle is using the best AI coding tools and the best developers, not only to accelerate our SaaS business, but to deliver solutions that enable entire ecosystems across numerous industries.”

Sicilia added that "some smaller or single-focus SaaS players may well be disrupted, but Oracle will not be among them."