The AI bubble theory persists, Oracle's stock has been halved: Even a good earnings report tonight can't save it?

Oracle is facing an especially tough earnings season. Amid sustained concerns about AI capital expenditures in the market, the enterprise software giant finds itself in a dilemma—**increasing spending exacerbates debt and cash flow pressures; cutting spending triggers fresh doubts about its competitiveness.** Oracle’s share price has fallen 54% since hitting a record high on September 10 last year, making it the worst performer among S&P 500 constituents over the same period. The last time Oracle saw a drawdown of over 50% was during the bursting of the internet bubble, and it took years to fully recover. After Tuesday’s US market close, Oracle will announce its third-quarter results. According to Bloomberg’s consensus estimates, **earnings per share are expected to grow about 30% year-over-year, revenue by about 20%, and cloud infrastructure sales may jump 82%.** However, **capital expenditure for fiscal year 2026 is expected to exceed $50 billion, and free cash flow remains negative,** making it difficult for investors to easily buy in even in the face of strong results. "It’s a Catch-22 situation," said Peter Andersen, Chief Investment Officer at Andersen Capital Management, which manages about $4.5 billion in assets. He noted that **if Oracle maintains high levels of AI spending, it will raise concerns about financial leverage and the balance sheet; if it cuts spending, the market will question its ability to strategize against major competitors.** **Good earnings may not suffice: Microsoft and Amazon provide a precedent** Microsoft and Amazon offer Oracle the most direct reference. **Both companies previously reported better-than-expected quarterly results, but their share prices declined after earnings due to concerns about AI capital expenditures.** The market logic is clear: in the current climate, strong growth figures are not enough to offset fears of capital depletion. Although Oracle’s cloud infrastructure sales this quarter are expected to surge 82% year-over-year, the market may **pay more attention to management’s statements regarding future capital expenditures.** In a market already highly alert to AI narratives, any signal of spending beyond expectations could be magnified in interpretation. Peter Andersen stated that he currently holds no Oracle shares, but if the company reduces capital expenditures and the share price continues to decline, he will consider buying in. This highlights the market’s current paradox—**good news struggles to drive buying, while bad news is enough to trigger selling.** **Cash flow under pressure: The weight of $50 billion capital expenditures** Oracle’s huge bet on AI infrastructure is rapidly worsening its financials. Last quarter, free cash flow was about negative $10 billion, **a historic low**; this quarter is expected to see around negative $7.3 billion. **Fiscal year 2025 marks Oracle’s first negative free cash flow since 1990, and this is expected to continue at least until fiscal year 2028.** In terms of capital expenditure, Oracle expects to spend over $50 billion in fiscal year 2026 (ending this May), more than doubling the previous year; by fiscal year 2029, this figure is expected to exceed $85 billion. To fund cloud infrastructure expansion, the company plans to raise up to $50 billion this year through a mix of debt and equity financing. This stress has already sounded warning signals in the credit markets. **Oracle’s five-year credit default swap (CDS) spreads recently hit their highest level since January 2009, directly reflecting heightened market vigilance towards its leverage risks.** Brian Mulberry, client portfolio manager at Zacks Investment Management (which holds Oracle shares in several portfolios), said: "Markets are evaluating whether these debt burdens and expenditures will lead to future growth, and this concern must be taken seriously. As long as Oracle can prove that spending will eventually convert to positive cash flow and profits, I think it’s bearable, but it warrants ongoing attention." **Project setbacks and layoffs: AI expansion strategy faces twists** **Oracle’s AI expansion plans have recently encountered new uncertainties.** According to media reports last week, Oracle and startup OpenAI have shelved plans to expand their flagship AI data center in Texas, due to financing issues and changing demands from OpenAI itself. Meanwhile, it is reported that **the company also plans to cut thousands of jobs to control costs arising from AI infrastructure construction.** It is noteworthy that this quarter’s Oracle earnings will also influence another giant deal: In Paramount Skydance’s $111 billion acquisition of Warner Bros. Discovery, Oracle Chairman Larry Ellison, acting personally through a trust fund, provided $45.7 billion in equity collateral, with the trust primarily holding Oracle stock. **Valuation falls back to historic averages; analysts see buying opportunities** A side effect of this sell-off is that **Oracle’s valuation has returned to a relatively reasonable range.** Based on expected earnings, its current price-to-earnings ratio is about 19, well below the over-45 levels at last September’s peak, and close to its 10-year average of 17, making it increasingly attractive. Wall Street analysts are generally optimistic. Oracle’s 12-month average target price is around $260, compared to Monday’s closing price of about $152, implying a 71% upside—one of the highest implied returns since records began in 2003. Jefferies analyst Brent Thill wrote in a March 5 research report: "We think the market may underestimate Oracle’s upside potential and growth catalysts. We believe this is an attractive opportunity, supported by a reaccelerating growth story, highly profitable core software business, and relatively low long-term AI erosion risk." Brian Mulberry holds a similar view, stating: **"Market enthusiasm for AI spending has faded, but as long as data center construction continues, we remain confident about growth expectations.** As share price momentum is absorbed, real value is emerging—this is a buying opportunity." Risk warning and disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their own circumstances. Invest accordingly at your own risk.