Oracle stock drops 3% as earnings test AI growth narrative

Oracle Corp. ORCL shares fell 3.3% in premarket trading on Wednesday ahead of the company's quarterly earnings report.

Investors are closely watching whether Oracle's rapid expansion in artificial intelligence infrastructure can justify its rising debt levels and negative free cash flow.

The company's results arrive at a critical moment for the broader AI sector.

Investor enthusiasm for artificial intelligence-related stocks has cooled in recent days following Broadcom's earnings report, which failed to provide the stronger growth outlook many investors had anticipated.

The Philadelphia Semiconductor Index has fallen 9.1% since Broadcom's report, while the Nasdaq 100 has declined nearly 5%, highlighting growing investor scrutiny of AI-related spending and returns.

Analysts expect Oracle to report adjusted earnings of $1.96 per share on revenue of $19.1 billion for its fiscal fourth quarter, representing approximately 20% revenue growth and 15% earnings growth from a year earlier.

Cloud growth remains the key focus

Oracle's transformation from a traditional software company into a cloud and AI infrastructure provider has become the central driver of investor interest.

The company's Oracle Cloud Infrastructure (OCI) business is expected to remain the main growth engine.

Analysts surveyed by Bloomberg expect OCI revenue to increase 92% in the fiscal fourth quarter, compared with 52% growth during the same period a year ago.

Strong cloud demand has helped accelerate Oracle's overall growth.

The company's Q3 results was its first quarter in more than 15 years in which both revenue and earnings grew organically by more than 20%.

Supporters of the stock point to Oracle's massive remaining performance obligations backlog, which stands at $553 billion.

The backlog represents contracted future revenue and is often viewed as a measure of long-term demand.

Oracle has also outlined ambitious long-term targets.

By fiscal 2030, the company expects OCI revenue to reach $166 billion and account for roughly three-quarters of total sales, a shift that would significantly reshape its business model.

Massive AI investments pressure finances

Despite the strong growth outlook, Oracle's aggressive investment strategy is creating concerns among some investors.

The company has dramatically increased spending to expand its cloud and AI infrastructure footprint. Oracle's capital expenditures reached $50 billion, compared with $12.1 billion during the comparable nine-month period a year earlier.

To help fund those investments, Oracle announced plans in February to raise as much as $50 billion through bonds and convertible preferred stock.

The spending surge has weighed heavily on cash generation. Trailing free cash flow currently stands at negative $24.7 billion.

For the fiscal fourth quarter, analysts expect free cash flow to remain negative at approximately $3.5 billion.

While that would represent a slight deterioration from negative $2.9 billion a year earlier, it would mark an improvement from the previous two quarters, when negative free cash flow exceeded $20 billion.

Long-term debt has climbed above $124 billion, while interest expenses increased 32% year over year.

Margins and leverage under scrutiny

The shift toward cloud infrastructure is also affecting Oracle's profitability profile.

Debt and lease liabilities rose 68% in the most recent quarter to $162 billion. Oracle also reported an additional $261 billion in lease liabilities that had not yet commenced as of February.

Depreciation expenses are beginning to reflect the company's infrastructure buildout. Depreciation rose to 12.5% of companywide sales in the latest quarter, up from 7.1% a year earlier.

As a result, analysts expect Oracle's adjusted operating margin to decline to 43% from 44% in the prior year period. Gross margin is also projected to fall to nearly 67%, down from about 72%.