Is Oracle's financial report truly bearish? What is the market panicking about?

Oracle plunged 12% early Thursday, marking the biggest single-day drop since last December. The earnings report released the previous day showed its cloud infrastructure business (OCI) is accelerating, AI-related orders hit a record high, and remaining performance obligations (RPO) exceeded $638 billion. However, after the earnings release, the stock switched from gains to losses, falling sharply after hours, forming a stark contrast with the data above.

According to a Bernstein research report on June 11, Oracle's cloud business performance was mixed this quarter: total cloud revenue came in slightly below expectations, mainly dragged down by extended SaaS (software-as-a-service) procurement cycles; but OCI (Oracle Cloud Infrastructure), the main highlight, outperformed expectations with IaaS revenue up 93% year-on-year to $5.8 billion.

Management also updated fiscal 2027 guidance: reaffirming a revenue target of $90 billion and raising non-GAAP EPS guidance to $8.05. In terms of capital expenditure, the company revealed net cash capital expenditure for fiscal 2027 is about $70 billion. If including customer prepayments and supplier payment timing differences, total capital expenditure is expected to reach $90–95 billion.

The market's concern is not demand, but the intensity of investment. As investors are still digesting a new round of AI compute arms race led by OpenAI, Anthropic, and major cloud providers, Oracle announced capital expenditure guidance far above expectations, significantly exceeding previous consensus. By comparison, Oracle’s total revenue for fiscal 2025 is $57.4 billion—this scale of capital spending is almost unprecedented for a company centered on enterprise software and cloud services.

This led the capital markets to a key divergence: Is Oracle securing the future AI growth dividend in advance, or embarking on a high-leverage, high-risk expansion path? This is the root cause of the post-earnings stock volatility.

Panic 1: Is $90 billion in capital expenditure out-of-control expansion?

The biggest controversy in the earnings report comes from capital expenditure guidance. Oracle expects total capital expenditure for fiscal 2027 to reach $90–95 billion, an explosive increase from prior levels, approaching investment sizes of some mega cloud providers.

For many investors, this means twofold risk. First is cash flow pressure. AI data center construction requires massive investment in GPUs, networking equipment, and power infrastructure, with asset payback periods often lasting years. If future AI demand growth slows, massive spending could quickly turn into asset burdens.

Second is financing pressure. The company also disclosed plans to add about $40 billion in new financing over the next year, including a previously authorized $20 billion equity financing plan. This further increases concerns around equity dilution and balance sheet deterioration.

From a traditional software valuation perspective, this aggressive expansion path is clearly unsettling.

Panic 2: Will the AI bubble repeat?

Deeper market worries come from the entire AI industry. For the past year, the biggest controversy in tech circles has centered on one question: Is AI demand truly growing, or is it being brought forward by capital market hype?

Microsoft, Amazon, Google, and Meta are building data centers at unprecedented speed, and Oracle has now joined the race. If future AI model training demand slows, and enterprise clients cut compute procurement, current large-scale data center construction could face declining utilization risk.

This explains why some investors see Oracle’s huge capital expenditure as a sign of an “AI cycle top.” In their view, the company is betting future sustained demand on current valuations, and any slowdown could magnify investment risk.

$638 billion RPO: The overlooked signal

However, Bernstein analysts believe the market’s focus may be misplaced.

Compared to the $90 billion capital expenditure, the $638 billion RPO deserves more attention. RPO, or remaining performance obligations, refers to signed but not yet recognized revenue—order backlog. At the end of the fourth fiscal quarter, Oracle’s RPO hit $638 billion, with $85 billion added in one quarter, surging 363% year-on-year.

More importantly, the new orders are mainly from large AI projects. The company revealed that in this quarter alone, four customers signed long-term contracts over $8 billion each. This means Oracle is not building data centers and then looking for clients, but expanding capacity based on substantial orders already landed.

In infrastructure industries, this order matters. Investors see capital expenditure; management sees locked-in future revenue.

AI data centers: Not vacancy risk, but capacity bottleneck

From management’s disclosures, the issue Oracle faces is not lack of demand, but supply deficiency.

So far, the company already has about 1.2 GW of data center capacity, with plans to add nearly 1 GW next quarter. Meanwhile, Oracle has secured future capacity resources in excess of 10 GW, and notes that the vast majority has already been pre-booked by clients.

This means Oracle’s investment logic is closer to manufacturing capacity expansion, not the “traffic bet” seen in the Internet age. When clients are already signed and prepayments made, new capital expenditure is essentially fulfilling future revenue.

In fact, the company disclosed that about $20–25 billion of capital expenditure will be directly covered by customer prepayments, further reducing its own funding pressure.

The undervalued growth curve: Sovereign AI cloud

Besides AI training clusters, Bernstein emphasizes an easily overlooked opportunity—sovereign AI cloud.

As governments increasingly value data security and AI autonomy, more countries are building localized AI infrastructure. Compared to Microsoft, Amazon, and Google, Oracle has long cultivated the government and enterprise database market, giving it a unique first-mover advantage in the sovereign cloud sector.

Analysts believe that in coming years, sovereign AI cloud may become a new growth engine after OCI. Notably, these businesses often involve customer-supplied hardware or prepayments, yielding higher capital efficiency and potentially better margins than traditional cloud businesses.

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