Cash Flow Is Still a Long Way Off: Why Oracle's Stock Has Stalled

Shares of cloud computing provider and software developer Oracle jumped 7% in after-hours trading on September 10 following the release of its earnings report, but during Friday’s regular trading session, the stock lost its gains and briefly fell more than 1%. The company reported that its contract backlog increased by $26 billion during the quarter. This somewhat eased investors’ concerns about Oracle’s large-scale investment program, which is largely financed by debt, Reuters reports. However, analysts warn that Oracle is still far from restoring its cash flow, the agency emphasizes.

Oracle reported that approximately half of its $664 billion order backlog is expected to be converted into revenue over the next 36 months. At the same time, a significant portion of the new contracts will not require the company to incur capital expenditures of its own: Oracle is counting on advance payments from customers and the use of customer-owned chips when building new capacity, Reuters reports. The company previously announced that it would raise $40 billion through debt and equity financing in the current fiscal year. This amount includes a $20 billion stock offering completed in the first quarter. The company’s debt has risen to $125 billion, according to CNBC, and negative free cash flow reached $5.4 billion, the financial statements show. However, analysts, according to LSEG, had forecast a cash outflow of $9.56 billion.

From the start of the year through the close of trading on September 10, the company’s shares lost more than 21%, while the S&P 500 index gained nearly 11%. Investors have questioned the wisdom of Oracle’s costly investments in AI and the prospects for its traditional software business in the age of artificial intelligence, Reuters reports.

— “Although Oracle is asking customers to partially finance their hardware purchases to ease pressure on cash flow, we do not expect any significant changes in Oracle’s cash flow situation in the near future,” Morningstar analyst Luke Young told Reuters. — “It will take years before revenue from the cloud business reaches a scale that will allow the company to simultaneously continue expanding capacity and generate positive cash flow.”

— Oracle’s free cash flow remained negative, but the outflow was significantly smaller than analysts had expected. “The results marked a solid step forward and helped balance investors’ perception of the company: Oracle is demonstrating accelerating revenue growth even at a significant scale of business. The company’s debt burden does indeed raise legitimate concerns, but the positive aspects of its business have been overshadowed by the overall picture,” Reuters quotes a note from Evercore analysts as saying.

— Piper Sandler analyst Billy Fitzsimmons noted that Oracle maintained its annual capital expenditure forecast at $70 billion, even though investors had feared it would be raised. “Oracle directly addressed several of the ‘bears’ arguments at once,” MarketWatch quotes Fitzsimmons as saying.

— Bernstein analyst Mark Merdler added that investor interest in Oracle shares remains high, and those who do not yet own the company’s stock are trying to “grasp the scale of the opportunities and confirm that the bears’ concerns are unfounded.” According to him, the latest report has increased the “clarity” of the positive investment case for the cloud computing provider’s stock. “Oracle is not only executing its plans well but has also become better at explaining what’s happening, providing more detail, clarity, and confidence. The company is also diversifying its customer base while increasing RPO (the cost of contracted services—Oninvest), and this does not require significant additional cash outlays,” MarketWatch quotes Merdler as saying.

— One of the key takeaways from the earnings report was the 121% year-over-year revenue growth in Oracle’s cloud infrastructure business (OCI), noted StoneX analyst Yi Fu Li. “Oracle continues to secure major AI-related contracts, while emphasizing that customer demand still outpaces available supply,” he noted in a report cited by MarketWatch. According to Li, the report shows that “enterprise AI continues to transition from experimentation to industrial-scale deployment.”

— JPMorgan analysts noted that the latest quarterly results alleviated key concerns regarding delays in data center construction. The team led by Samik Chatterjee pointed out that Oracle added 850 MW of AI computing capacity during the quarter—three times more than in the previous reporting period.

— “We saw both stronger performance in the current period and higher volumes of new orders for future periods than we had expected. It’s a win-win,” added Jackson Ader, an analyst at KeyBanc Capital Markets. He notes that Oracle secured more than $30 billion in new AI orders from a number of new partners during the quarter, and the company will not need to raise additional funding to fulfill these contracts. “Reducing dependence on a small number of AI giants was an important positive takeaway,” Barron’s quotes Ader as saying.

— Nevertheless, some analysts remain concerned—primarily about the gross margin—the portion of revenue remaining after deducting the cost of goods and services, notes MarketWatch. Morgan Stanley analyst Sanjit Singh said he would like to see further stabilization of the margin, as well as more details on the timeline for the launch of new data centers, the publication reports.

Overall, Wall Street has a positive outlook on Oracle stock: 36 of the 45 analysts tracking the cloud services provider’s stock recommend buying it, according to MarketWatch data. Eight analysts have a neutral stance, and one recommends selling the stock. The analysts’ consensus price target is $244.40 per share, which is nearly 60% higher than the closing price on September 10.

This article was AI-translated and verified by a human editor