Oracle's (ORCL.US) consistent earnings beats are no longer sufficient to ease market concerns over its mounting debt and fears of an impending AI bubble burst. Only a performance surge akin to Nvidia's 100%+ explosive growth in 2023-2024, along with more cloud computing contracts beyond OpenAI in its outlook, could fully assuage worries about the company's fundamentals and the broader AI infrastructure-linked tech sector.
Scheduled to report earnings after the U.S. market closes on Wednesday, Oracle has become a focal point in the recent AI bubble debate, which has triggered a market correction. The company's future is now deeply tied to OpenAI's long-term, high-value—yet largely unfulfilled—cloud infrastructure contracts, including the "Stargate" AI project. To meet these ambitious commitments, Oracle is taking on massive debt and ramping up capital expenditures (capex) to expand or build new AI data centers for OpenAI. However, its free cash flow has turned negative, and credit default swap (CDS) prices have surged to multi-year highs, highlighting the growing debt burden and repayment risks.
OpenAI, valued at $500 billion, has secured AI compute supply agreements worth hundreds of billions with tech giants in recent months, nearing CEO Sam Altman's envisioned $1.4 trillion AI infrastructure spending plan. Yet, with Google's Gemini3 gaining traction and eating into ChatGPT's user base, doubts are rising over OpenAI's ability to sustain such massive expenditures. A potential funding shortfall at OpenAI could severely impact Oracle and other "OpenAI-linked" stocks.
Market sentiment has shifted from bullish to skeptical regarding AI infrastructure investments tied to OpenAI, contrasting sharply with the enthusiasm around the "Google AI chain" post-Gemini3's launch. Oracle's valuation-debt-cash flow triangle now appears fragile. Once seen as a stable tech giant, Oracle now resembles a "high-leverage gambler" betting heavily on future AI returns. If OpenAI's revenue growth or AI infrastructure expansion slows significantly, Oracle risks becoming the epicenter of a potential AI bubble burst, echoing the dot-com crash of 2000.
Three months ago, Oracle's stellar earnings and cloud infrastructure orders sent its stock soaring to a 30-year high. But since peaking on September 10—driven by a surge in cloud orders—its shares have plunged 33%. The company, along with other AI-focused firms, faces skepticism over tech giants' ballooning capex and OpenAI's complex financing structure.
"They're stretching their balance sheet to the limit, with negative free cash flow and high leverage," said Jed Ellerbroek of Argent Capital Management, an Oracle shareholder. "They're sticking their necks out."
Oracle's debt risks are particularly alarming. Recent bond issuances and project financing have raised billions, while its CDS costs hit a 14-year high last week. Analysts warn that long-term uncertainties overshadow any positive quarterly results.
"It's not just about growth rates but how they’re funding this expansion," said Gabelli Funds' Ryuta Makino. "They’ll face prolonged negative free cash flow during global AI data center builds, raising many questions."
Wall Street expects Oracle's backlog of cloud orders—primarily from OpenAI—to grow in its fiscal Q2 (ending November). Remaining performance obligations (RPO), a key driver of its September rally, are projected at ~$520 billion, up over 400% YoY. However, if cloud orders or RPO fail to match Nvidia's 2024-like surge and cash flow remains negative, Oracle could face a steep selloff.
"It’s a perception issue—how they achieve these grand goals," said Michael Sansoterra of Silvant Capital Management, another Oracle investor. "Earnings might not change the narrative. Guidance could be strong, but will it satisfy the market?"
Analysts forecast adjusted EPS growth of 11% YoY and ~15% revenue growth, with gross margins slipping to ~69% from 71%. Capex is expected to double to $8.2 billion, while free cash flow could swing to -$5.9 billion from +$2.7 billion.
On the earnings call, Oracle executives will likely face questions about OpenAI's contracts and revenue prospects. Investors seek diversification in cloud orders/RPO sources; new major clients would be welcomed.
"Leveraging up while tying their future to AI startups was always risky. With OpenAI struggling, the risk is higher," said Jonestrading's Michael O’Rourke. "If OpenAI falters, Oracle needs a contingency plan."
Options traders anticipate a 10% post-earnings stock swing. Despite a recent 10% December rebound, Oracle trades at a premium—30x forward P/E vs. its 10-year average of 17x and the Nasdaq 100's 26x.
Some investors remain cautious. "We’d be more interested if gross margins show tangible improvement, not just promises," said Sansoterra. "But we haven’t seen that yet—we don’t invest on hope."
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