After a big week of bullish headlines around artificial intelligence and cloud, Oracle(NYSE: ORCL) gave back a chunk of its gains on Friday. Shares fell about 7% after rising earlier in the week on the company’s expansive long-term outlook and reports of very large cloud commitments.
The database and applications giant has been one of the market’s highest-profile artificial intelligence (AI) beneficiaries this year as enterprises race to secure computing capacity. The question now is whether the latest pullback offers a sensible entry point or simply reflects the market catching its breath.
Oracle is best known for its database and enterprise applications, but its growth engine today is Oracle Cloud Infrastructure, the company’s hyperscale computing platform that powers AI training and inference alongside traditional workloads. Recent management commentary and results point to a business with unusual visibility into future demand. However, converting that demand into profitable revenue at scale will require significant capital and flawless execution. Additionally, even though there is significant visibility to demand, there are risks that the demand may change.
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The backdrop for Friday’s move is last month’s fiscal first-quarter update, when Oracle reported a dramatic jump in remaining performance obligation (RPO), a measure of contracted revenue that has not yet been recognized. Management said RPO surged 359% to $455 billion after the company signed multiple multibillion-dollar agreements. Those figures help explain why the stock soared on the announcement and why investors now view Oracle less like a mature software vendor and more like a fast-scaling cloud platform with multiyear revenue locked in.
In the days since, Oracle hosted an AI-focused analyst event and laid out aggressive long-term targets for cloud infrastructure revenue and companywide growth. Management said it expects cloud infrastructure revenue of $166 billion by fiscal 2030 and total revenue of $225 billion by then, with adjusted earnings per share of $21.
The company also disclosed that $65 billion in new commitments were booked in a 30-day period, including a $20 billion deal with Meta Platforms, and that these bookings came from customers beyond OpenAI. In other words, demand is real, contract duration is long, and the pipeline appears to be diversifying beyond a single flagship customer.
Why did the stock fall on Friday if the outlook is so strong? Expectations were already elevated after the RPO announcement and a powerful year-to-date run, and the analyst-day disclosures raised fresh questions about the cost to deliver so much capacity so quickly.
It’s reasonable to have concerns about capital spending and near-term free-cash-flow pressure as Oracle builds data centers, acquires hardware, and finances long-duration contracts. While negative free cash flow for a year or two wouldn’t necessarily break the long-term story, it does increase risks and ultimately influence how investors handicap the timing and magnitude of the payoff.
All of this also helps to put Friday’s sell-off in context. Even after the decline, Oracle’s market capitalization sits at about $830 billion (up from less than $500 billion one year ago), reflecting a massive rerating this year as investors priced in years of high-margin cloud growth. Yes, the company is still below its early September high after the company shocked Wall Street with a 359% increase in RPOs. But the stock’s valuation ultimately remains far above where it was a year ago — and the valuation looks rich.
There are also company-specific execution risks to weigh. RPO is not guaranteed cash flow — far from it. It becomes revenue and cash flow only as Oracle brings capacity online and customers scale usage. Additionally, competition is intense, with well-financed peers similarly chasing growing AI workloads.
Financing also matters. If the build-out leans on more debt or other funding, this could lead to balance sheet risk and reduce profitability. Indeed, credit rating agency Moody’s recently flagged risk tied to Oracle’s roughly $300 billion of AI contracts and raised leverage concerns under heavy capex.
For investors looking at the stock after Friday’s sell-off, it may make sense to start a position here. The backlog and a widening roster of large customers support a multiyear case for Oracle Cloud Infrastructure. Expectations are high, though, and the capital required to deliver on those contracts is significant.
That mix argues for a small initial position, with room to add on execution milestones or on further weakness rather than committing all at once. If Oracle keeps converting contracted demand into revenue at healthy margins and ultimately executes well on its capacity build-out, today’s pullback could age well.
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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Moody’s, and Oracle. The Motley Fool has a disclosure policy.
