Fundamental Signals

Editor's Notes:

• Oracle feels like one of the clearest examples of how the AI trade is evolving from a margin story into a balance-sheet story. On the surface, the growth narrative is undeniable: OCI is scaling rapidly, RPO has exploded on the back of the OpenAI deal, and management is openly targeting $200B+ in revenue by the end of the decade. That level of ambition explains why the stock can still react positively to headlines like the TikTok JV or new AI partnerships.

• But beneath that growth is where the real debate sits—and where I’m more conflicted. Oracle is effectively re-rating itself from a cash-generative enterprise software company into a capital-intensive AI infrastructure builder. The surge in capex, negative free cash flow, ballooning long-term lease obligations, and rising CDS spreads aren’t noise; they’re the unavoidable cost of competing at hyperscaler scale. The violent market reaction to Q2 wasn’t about a revenue miss—it was about investors suddenly recalibrating how much leverage and execution risk this strategy carries.

• For professional investors, ORCL no longer looks like a “set-and-forget” compounder. It’s becoming a long-duration infrastructure bet with real binary elements: OpenAI demand durability, data-center execution, funding discipline, and whether AI workloads can ultimately earn software-like returns on hardware-heavy assets. The upside is meaningful—but so is the risk, and Oracle is no longer being valued like a boring old database company.

Chronological Narrative of Key Events:

Late 2025 Fiscal Q1 (ending August 31, reported in September):

Oracle reported its fiscal first-quarter results, with revenue of $14.93 billion, slightly missing analysts' estimates of $15.01 billion, but still representing 12% year-over-year growth. Cloud revenue increased 28%, and non-GAAP EPS matched forecasts at $1.47. Crucially, the company's Remaining Performance Obligations (RPO) surged 359% year-over-year to $455 billion, driven by major cloud infrastructure deals. This initially led to a 36% intraday jump in Oracle's stock.

September 2025 - OpenAI Deal & Debt Financing:

A monumental event was the reported $300 billion multi-year cloud computing agreement with OpenAI (starting in 2027) for AI infrastructure services, requiring Oracle to expand its server farm capacity. This deal was a significant contributor to the massive RPO backlog. To help fund its aggressive AI and data center expansion, Oracle issued $18 billion in high-grade bonds, with some maturities extending up to 40 years.

September/October 2025 - Strategic Direction & New Leadership:

Oracle upgraded its long-term financial projections, anticipating fiscal 2029 revenue of $185 billion (up from $104 billion previously projected) and fiscal 2030 revenue of $225 billion (a 31% CAGR from FY25). Non-GAAP EPS is forecast to grow 28% annually to $21 per share by fiscal 2030. Oracle Cloud Infrastructure (OCI) revenue is projected to surge from $18 billion in fiscal 2026 to $144 billion by fiscal 2030.

The company also underwent a significant management change, with Clay Magouyrk and Mike Sicilia appointed as co-CEOs, succeeding Safra Catz (who became Vice Chair). This leadership transition coincided with a 30% drop in Oracle's stock price during the quarter, its sharpest since 2001.

September 2025 - Divestment:

Oracle divested its stake in Ampere Computing, generating a $2.7 billion pre-tax gain. This move signaled a strategic shift towards a "chip-neutral" approach, where Oracle will collaborate with various CPU and GPU suppliers, including Nvidia, rather than developing its own chips.

October/November 2025 - Product & Market Initiatives:

Oracle launched its AI Database 26ai, OCI Zettascale10 (described as the largest AI supercomputer in the cloud), and an AI Agent Marketplace. It also announced efforts to retrofit its existing databases for AI compatibility. The company established strategic partnerships, including a go-to-market agreement with Zoom Communications Inc. for customer engagement solutions, and a collaboration with Astris AI (a Lockheed Martin subsidiary) for government AI solutions. Oracle secured Bluehost Group as a customer for OCI, migrating nearly 1 million customers with reported 4-5x improvements in response times and up to 30% cost reduction. Hyatt also adopted Oracle's OPERA Cloud hospitality platform. Oracle also initiated layoffs as part of a $1.6 billion restructuring plan, with 260 employees impacted in Washington state.

November 2025 - Mounting Concerns & Analyst Actions:

Investor sentiment for Oracle deteriorated significantly during November, with the stock tumbling 23%. High-profile investor Michael Burry alleged that Oracle and other hyperscalers were artificially inflating earnings by understating data center equipment depreciation. Oracle's credit default swap (CDS) spread reached a 2-year high, reflecting bond market concerns over the company's escalating debt and AI investments. Morgan Stanley analysts advised clients to "stop lending to Oracle, start betting on insurance," predicting Oracle's financial liabilities could nearly triple in three years. Meanwhile, David Tepper's Appaloosa Management completely exited its position in Oracle during Q3, citing profit-taking and concerns over valuation and capital expenditure. First Eagle Investment also reduced its stake by 2.3 million shares.

December 2025 Fiscal Q2 (ending November 30, reported December 10):

Oracle reported mixed results for its fiscal second quarter. Revenue of $16.06 billion missed Wall Street estimates of $16.19 billion, despite a 14.2% year-over-year growth. However, adjusted EPS of $2.26 significantly beat the $1.64 consensus. Cloud infrastructure revenue grew a robust 68%. The company reported negative free cash flow of $10 billion and capital expenditures of $12 billion.

Management increased its fiscal 2026 capital expenditure outlook by $15 billion to $50 billion, and outlined plans for $248 billion in long-term lease obligations to support cloud expansion. This news led to a massive market reaction, with Oracle's stock plunging 10.8% to 15% immediately after earnings, wiping $100 billion in market value.

The company also provided Q3 guidance, projecting adjusted EPS of $1.70 to $1.74 and revenue growth of 19% to 21%. Separately, Oracle raised its fiscal 2027 revenue outlook by $4 billion to $89 billion.

December 2025 (post-earnings) - Aftermath and Further Developments:

• Data Center Delays: Bloomberg reported delays in OpenAI data center completion from 2027 to 2028 due to labor and material shortages, further impacting Oracle's stock. Oracle, however, denied these delays, stating all contractual commitments were on track.

• Michigan Data Center Funding Issues: News broke that Blue Owl Capital, a major partner, would not back a $10 billion data center project for OpenAI in Michigan, leading to further stock declines. Oracle disputed the narrative, stating it was "on schedule" with a different equity partner (Blackstone reportedly in talks).

• TikTok Joint Venture: Oracle, along with Silver Lake and MGX, formed a joint venture to acquire a controlling stake in TikTok's U.S. operations, valued at ~$14 billion. Oracle will take a 15% stake and serve as the "trusted security partner" for U.S. user data. This deal was met with a positive market reaction, with Oracle's shares jumping 5-8%.

• Larry Ellison's Personal Finances: Oracle's founder, Larry Ellison, pledged 30% of his Oracle shares (valued at $69 billion) as collateral for personal loans. He also personally guaranteed $40.4 billion to back Paramount Skydance's bid for Warner Bros. Discovery. Senator Bernie Sanders criticized Ellison's views on AI surveillance.

• Analyst Reactions: Wells Fargo reaffirmed its 'Overweight' rating, citing AI growth and the TikTok deal, believing AI concerns were "overblown." However, D.A. Davidson maintained 'Hold' due to financial obligation concerns related to OpenAI, and Morningstar lowered its price target from $286 to $277 due to AI project uncertainty and debt concerns. Scotiabank significantly cut its price target from $360 to $260.

Topical Breakdown:

1. Financial Performance & Outlook:

• Q1 FY26 (ended Aug 31): Revenue $14.93B (missed est. $15.01B), +12% YoY. Non-GAAP EPS $1.47 (matched est). Cloud revenue +28%. RPO $455B (+359% YoY).

• Q2 FY26 (ended Nov 30): Revenue $16.06B (missed est. $16.19B), +14.2% YoY. Adjusted EPS $2.26 (beat est. $1.64), +57% YoY. Non-GAAP Operating Income $6.7B (+10% YoY).

• Guidance:

  • Q3 FY26: Adjusted EPS $1.70-$1.74. Revenue growth 19-21%.

  • FY26: Full-year revenue expectation of $67 billion remains unchanged. Capital expenditure outlook raised by $15 billion to $50 billion.

  • FY27: Revenue outlook raised by $4 billion to $89 billion.

  • Long-Term: FY29 revenue projected to $185 billion (from $104 billion). FY30 revenue projected to $225 billion (31% CAGR from FY25). FY30 adjusted EPS projected to $21 (28% CAGR). OCI revenue projected to reach $18 billion in FY26 and $144 billion by FY30 (77% annual growth rate).

• Cash Flow & Profitability: Reported negative free cash flow of $10 billion in Q2 FY26. Cloud business gross margin cited at only 14% in some reports, significantly lower than traditional software. This reflects the capital-intensive nature of AI infrastructure buildout.

2. AI & Cloud Infrastructure Strategy and Investments:

• Massive Investment: Oracle is aggressively shifting to a growth-oriented business model, heavily focusing on AI infrastructure and cloud expansion. This involves significant capital expenditures ($50B for FY26) and substantial long-term lease obligations (approx. $248B). The goal is to drive revenue to $225 billion by fiscal 2030.

• OpenAI Partnership: A multi-year $300 billion cloud computing agreement with OpenAI (services starting in 2027) is a cornerstone of Oracle's AI strategy. This deal contributed significantly to Oracle's Remaining Performance Obligations (RPO), which reached $523 billion. However, investor skepticism arose regarding OpenAI's ability to fund such commitments, and some analysts view the contract as potentially overstating its near-term impact on Oracle's financials.

• Data Center Expansion: Oracle is committed to building out vast data center capacity to support AI workloads. This includes plans for 37 new multicloud data centers, bringing the total to 71 globally. Investments include building large data centers in Texas and Wisconsin (partially funded by an additional $38 billion in debt plans).

• Michigan Data Center Setback: A planned $10 billion AI data center in Michigan for OpenAI faced a setback when original financier Blue Owl Capital withdrew funding, citing unfavorable lease terms. Oracle, however, denied delays and stated it was proceeding with a different equity partner (Blackstone reportedly in talks).

• Strategic Partnerships:

  • AMD: Partnered to deploy 50,000 AMD Instinct MI450 GPUs for an AI supercluster (starting Q3 2026), and AMD Venice CPUs in data centers, strengthening Oracle's AI chip supply.

  • Nvidia: Integrating Nvidia's Nemotron 3 AI models into OCI and partnering to build seven AI supercomputers (including Solstice and Equinox) with the U.S. Department of Energy. Also expanding the Abu Dhabi cloud region with Nvidia Blackwell GPUs.

  • Bloom Energy: Partnered to supply fuel cells for Oracle's data centers, addressing power demands for AI infrastructure.

  • Energy Transfer: Signed multi-year agreements to supply natural gas to three Oracle data centers in the U.S. (two in Texas).

• Product Development: Launched new AI Data Platform, AI Database 26ai, and OCI Zettascale10 (AI supercomputer). Actively retrofitting existing databases for AI compatibility.

• Chip Neutrality: Divested Ampere Computing and adopted a "chip-neutral" strategy, emphasizing collaboration with various CPU and GPU suppliers rather than in-house chip design.

3. Debt & Financial Health Concerns:

• Escalating Debt: Oracle's debt load has increased significantly, reaching over $100 billion (including $14 billion in operating lease liabilities as of Aug 31), due to aggressive borrowing for AI infrastructure and data center buildouts.

• Credit Risk: The cost of insuring Oracle's debt (CDS spreads) surged to a 3-year high (and highest since 2008 in some measures), reflecting increasing investor apprehension about its solvency and reliance on AI investments. Moody's changed Oracle's outlook from stable to negative.

• Negative Free Cash Flow: Large capital expenditures have led to negative free cash flow ($-10 billion in Q2 FY26, projected to be negative for a few years).

• Investor Skepticism: Investors are concerned about the ability to quickly translate massive AI investments into revenue, potential overspending, and the sustainability of cloud margins (some reports cite cloud gross margin at 14%).

4. Partnerships & Competitive Landscape:

• TikTok Acquisition: Oracle leads a consortium, including Silver Lake and MGX, to acquire a controlling stake in TikTok's U.S. operations, taking a 15% stake and serving as a "trusted security partner". This deal aims to address U.S. national security concerns and maintain TikTok's U.S. presence.

• Cloud Market Competition: Oracle is actively challenging major hyperscalers like AWS, Microsoft Azure, and Google Cloud, with its OCI showing strong revenue growth (+68% in Q2 FY26). However, it faces intense competition from new entrants in specialized AI ERP (e.g., DualEntry) and transactional databases (e.g., Databricks' Lakebase).

• Healthcare AI: Leveraging Cerner data, Oracle is pushing into healthcare AI, aiming for compliant AI models in diagnostics and predictive analytics, seen as a significant potential growth driver.

• Key Market Player: Oracle is recognized as a key player in growing markets like Employee Performance Management, Customer Data Platform (CDP), Utility Meter Data Management Systems, Healthcare Command Centers, and Transportation Management Software (TMS).

5. Management & Corporate Governance:

• CEO Appointments: Clay Magouyrk and Mike Sicilia were appointed as co-CEOs, with Larry Ellison taking more direct oversight of finance and other teams.

• Larry Ellison's Influence: Larry Ellison's personal financial commitments, including a $69 billion pledge of Oracle shares for personal loans and a $40.4 billion guarantee for the Paramount/WBD bid, drew attention and criticism (e.g., from Senator Bernie Sanders regarding AI surveillance).

6. Stock Performance & Analyst Ratings:

• Volatility: Oracle's stock has been highly volatile. After a 36% surge in September (following strong Q1 earnings and OpenAI deal), it plunged 30% (or 23% in November, -18% for the month of Dec) after Q2 earnings and data center funding concerns, wiping $100 billion in market value. It showed some recovery after the TikTok deal.

• Analyst Sentiment:

  • Positive/Overweight: Wells Fargo ($280 PT), Evercore ('Top Pick'), Barclays ($310 PT), Mizuho ($400 PT), TD Cowen ($400 PT), William Blair ('Buy'), Deutsche Bank ($375 PT), HSBC ($382 PT).

  • Neutral/Hold: D.A. Davidson ($200 PT), JPMorgan ($230 PT), Morgan Stanley ($320 PT), CFRA ($230 PT).

  • Caution/Sell: Scotiabank ($260 PT), Piper Sandler ($290 PT), Stifel ($275 PT), Rothschild & Co Redburn (initiated 'Sell').

  • Consensus: Despite recent declines, a consensus price target (from various sources) still implied significant upside, but there is clear divergence in analyst opinions, often linked to the perceived risk of AI investments and debt.

In conclusion, Oracle is in the midst of a profound and costly transformation, aggressively investing in its cloud and AI infrastructure to secure a leading position in the burgeoning AI economy. While it has secured massive deals and demonstrated strong growth in its cloud segments, these efforts are heavily debt-financed, leading to significant investor and credit market concerns about profitability, liquidity, and the long-term returns on these ambitious investments. The recent TikTok deal provides a new, high-profile customer and potential revenue stream outside of AI infrastructure, but the overall market sentiment remains a tug-of-war between Oracle's stated growth potential and the substantial financial risks involved.

Disclaimer: This content is generated using AI, synthesizing public data (filings, reports, news) and social media (Reddit, X). It may contain errors, inaccuracies, or hallucinations. Nothing herein constitutes financial advice. This newsletter is for informational purposes only; please consult a qualified professional and conduct your own due diligence before making any investment decisions.