Doubts about Oracle's "blockbuster deal": All relying on OpenAI, revenue is all long-term, can it make money, is there enough money to build it?

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Oracle's latest financial report has thrown the market into a paradoxical frenzy.

On one hand, the company's current revenue and short-term guidance both missed expectations; on the other hand, its remaining performance obligation (RPO, i.e., backlog orders) surged overnight to a "jaw-dropping" $455 billion. This dramatic increase was almost entirely driven by four contracts worth more than hundreds of millions each, and analysts both domestically and abroad generally believe the largest share is directly related to a long-term cloud service contract with OpenAI.

Meanwhile, the latest news has brought this mysterious massive RPO to light: on September 10th, reports indicated that OpenAI has signed a contract to purchase $300 billion worth of computational power from Oracle over the next five years, which means OpenAI will need to pay Oracle about $60 billion per year on average.

For investors, it is crucial to understand the true significance behind these figures. JPMorgan said in a research note on the 10th that the market may be ignoring several core issues: Is this epic order too concentrated on a single client (especially the reliance on OpenAI)? Will the vast majority of revenue take years to materialize? What are the profit margins on these AI orders? And, does Oracle have enough capital to fund the astronomical infrastructure construction needed to support these orders? These issues directly relate to Oracle's future profitability and cash flow health, and are key considerations investors must calmly evaluate amid the frenzy.

Explosive RPO Growth: All-in on AI and OpenAI

The most striking feature of Oracle's first fiscal quarter is undoubtedly the astonishing growth of its RPO. The $455 billion figure means an increase of about $317 billion in future business in a single quarter, a year-over-year growth of 359%. CEO Safra Catz told analysts that the company had signed contracts with three different customers in the quarter. She emphasized:

We have signed major cloud deals with the giants in the AI field, including OpenAI, xAI, Meta, Nvidia, AMD, and many other companies.

And the latest reports revealed the details of the order driving the market wild: on September 10th, OpenAI signed a contract to purchase $300 billion worth of compute power from Oracle over the next five years. The agreement will take effect in 2027, requiring 4.5GW of power capacity—equivalent to two Hoover Dams, enough to supply about 4 million households.

It should be noted that OpenAI is still an unprofitable startup, and as of June, had disclosed annualized revenue of about $10 billion—far less than the $60 billion in average annual payments required for this deal. Therefore, the success of this deal is entirely based on the assumption that ChatGPT can maintain its explosive growth and be widely adopted by billions of users worldwide as well as major enterprises and governments.

JPMorgan analysts commented that the majority of the newly added RPO belongs to long-term performance obligations, with only about 10% belonging to short-term RPO (i.e., revenue to be recognized within the next year), meaning the amount of new short-term contracts was almost flat quarter-over-quarter and most of the revenue will only be recognized in the distant future. Morgan Stanley's equity research team also estimated in a report on the 10th that only about 10% of this massive $455 billion RPO will be recognized as revenue in the next 12 months.

Although OpenAI's growth is extraordinary, it is also facing increasing pressures, including an expensive talent war, tense negotiations with Microsoft, and a for-profit restructuring currently under review by two state regulators. For OpenAI, this is an aggressive bet on future growth; for Oracle, this means heavily concentrating future income on a single client, posing major execution and market outlook challenges for both sides.

Short-term Financial Pressure, Guidance Misses Expectations

In sharp contrast to the brilliance of the backlog is Oracle's sluggish current performance and short-term outlook. Total revenue for the first fiscal quarter grew 11% at constant currency, below the 13% market consensus. Cloud services and license support revenue grew 14% (constant currency), also lower than the consensus forecast of 16%.

What worries the market more is that the company's guidance for total revenue growth in the second fiscal quarter is 12–14%, lower than the expected 15%; total cloud revenue growth guidance is 32–36%, also falling short of the 37% expectation. Analysts noted in their reports that this reflects the fact that most of the newly added RPO belongs to long-term contracts and offers limited contribution to near-term financials.

At the same time, Oracle's free cash flow is under pressure from massive capital expenditures. First fiscal quarter free cash flow was negative $362 million, far below the expected $1.271 billion. To support the construction of cloud infrastructure (OCI), the company raised its FY2026 capex guidance by $10 billion to $35 billion, suggesting that free cash flow will continue to face pressure for some time.

Balancing Profit and Growth

Oracle is making a typical "trading profit for growth" gamble. JPMorgan argues that most of the new orders are related to AI model training, a business with relatively low profit margins, which may drag on operating profit growth for the long term, making it slower than revenue growth.

Based on this, the bank expects that, following Oracle’s results, the market’s consensus for Oracle's income in the coming years will be raised, but earnings per share (EPS) expectations will change only slightly and free cash flow (FCF) expectations will be revised downward.

Oracle set its FY2026 operating profit growth guidance at "mid-teens", slightly higher than the market's current expectation of about 12% growth. JPMorgan believes this likely reflects cost savings from recent layoffs rather than strong profit growth from the underlying business.

JPMorgan Maintains Neutral Rating, Raises Target Price

Despite many doubts and short-term pressures, JPMorgan acknowledges Oracle's "impressive achievement" in acquiring OCI business and recognizes its long-term potential in AI. The bank raised Oracle's target price from $210 to $270, mainly due to its increased expectations for OCI's multi-year growth trajectory.

However, it maintained a "neutral" rating on Oracle, arguing that risk and reward are "tending toward balance" at present. While positive data points related to AI may dominate market discussions in the short term, investors ultimately need to focus on fundamentals such as profit margins and cash flow. Oracle's success depends on whether it can efficiently build datacenter capacity, sustain OCI order growth, and successfully integrate its prior Cerner acquisition.

As of press time, Oracle's premarket US stock price remains up, up 1.13% to $328.33.

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