Oracle was back in the news on Thursday. And not just in the news, but above the fold, however briefly.
As a quick reminder no one should need, Oracle’s an odd man out among the hyper-scalers: It’s trying to compete on the AI spending front with four of the largest, richest companies in the history of capitalism.
Some worry that’s a fool’s errand within a fool’s errand, which is to say if betting the house on history’s most expensive pipe dream is a risky endeavor to begin with, doing so when four companies with far deeper pockets are doing the same is a veritable kamikaze mission.
I’m not necessarily saying that’s my assessment, but there’s a reason markets are more skeptical of Oracle’s spending than they are of outlays by the other hyper-scalers.
In its earnings release Wednesday evening, the company said it spent more in the just-finished fiscal year than analysts expected. On the call, management suggested reported spending will be as much as $25 billion higher than previously anticipated during the just-begun fiscal year due to component prepayments.
Specifically, Oracle spent nearly $56 billion in fiscal 2026. That figure in fiscal 2027 will be about $70 billion.
The figure above gives you some context for the extent to which Oracle’s transformation from software business to AI compute provider is a Judy Garland moment.
Since the shares peaked in September — when Larry Ellison briefly became the richest person on the planet — the company’s struggled to convince markets it’s not over-spending. And relatedly, that it’s not taking on too much debt to offset the cash bleed.
The figure below, from Nomura’s Charlie McElligott, gives you some big-picture context for hyper-scaler FCF amid the capex boom, all set against the rally to successive new ATHs for the S&P.
“[In] this new world order of exponential capex funding needs, cash is being burned at ‘known unknown’ rates,” McElligott remarked.
If you’re Oracle — this actually goes for all five hyper-scalers, but the issue’s considerably more acute for Oracle — there’s no way to fund new cloud infrastructure without irritating somebody.
If you burn more cash, you’re playing into the market’s biggest fear. If you issue more debt, you’re playing into the market’s second-biggest fear (with nearly $120 billion of debt, Oracle’s the largest non-fin issuer in Bloomberg’s US high-grade index). And while you can get creative with equity-linked issuance, selling shares ultimately dilutes stockholders.
None of that’s to say this isn’t “working” for Oracle, depending on what you mean by “working.” Cloud infrastructure sales rose 93% to almost $5.8 billion last quarter, the company said. That was better than expected, even as the overall cloud revenue guide for the current quarter fell short of consensus.
The figure above shows you the trajectory of the infrastructure business.
That business is what’s eating the cash. Operating cash flow was a record $32 billion for the just-finished fiscal year, up by more than half. But free cash flow was negative to the tune of nearly $24 billion due almost entirely to “investments” in the cloud infrastructure business.
The RPO measure (i.e., Oracle’s backlog) was $638 billion at the end of May, easily higher than Street estimates. Oracle’s trying to get prepayments for the related GPUs.
“The prepaid and customer-supplied hardware portions of our large AI contracts now total $75 billion,” the company said. “This substantially reduces the amount of capital Oracle must raise to build out our AI data centers.”
As ever, the success or failure of this whole endeavor for Oracle depends heavily on OpenAI, which traditionally accounts for around half of the company’s backlog.
