Oracle Earnings to Test the Market's Tolerance for Massive AI Spending
nashnova research
Oracle reports Thursday after the close with cloud revenue expected to nearly double to $7.2 billion — but capital spending is set to hit $20 billion this quarter, dragging free cash flow to roughly negative $10 billion. This print is the market's acid test for whether big-ticket AI buildouts can last.
Why has Oracle become one of the S&P 500's worst performers?
The stock is down 17% year-to-date and has fallen more than half from its all-time high set a year ago.
This means → the market isn't pricing "Oracle can't do AI." It's pricing "can Oracle afford to?"
S&P Global downgraded the company to the lowest investment-grade rating in July. Its five-year CDS — a credit-default swap, essentially an insurance contract against default — hit a record high. Bond investors are already sounding the alarm with real money.
Cloud revenue is doubling — why isn't that enough?
Cloud infrastructure revenue is expected at roughly $7.2 billion, nearly double the $3.3 billion a year earlier. Earnings per share are forecast to rise about 30%.
But capital spending this quarter is projected near $20 billion, pulling free cash flow to roughly negative $10 billion — versus just negative $362 million a year ago.
In plain terms = revenue is growing fast, but spending is growing faster. Cash is leaving the company at the fastest rate in its history.
How big does the spending get from here?
Analysts project fiscal 2027 capex near $93 billion, up over 65% year-on-year. Fiscal 2028 rises further to over $104 billion before easing to about $95 billion in fiscal 2029.
Fiscal 2027 free cash flow is expected at negative $46.6 billion, worsening from negative $23.7 billion the year before.
This means → analysts don't see Oracle's cash flow turning positive until after 2029. Until then, the company must keep borrowing to stay afloat.
What would make this report a pass — or a red flag?
Coastal Bridge chief strategist David Waddell calls it "the earnings report that rules them all" — the market is using Oracle to judge whether the path from building AI to monetizing AI actually works.
Positive signal: cloud revenue, cloud margins, or cash-flow guidance beating expectations. Red flag: weakening cloud margins or cash-flow outlook, or any hint the company will tap credit markets again.
This reflects a deeper issue: Microsoft and Amazon have already shown signs of spending translating into growth, but the market doesn't consider those signals sufficient. Oracle, as the most leveraged major AI player, has to prove the case on its own.
The valuation looks cheap — but is cheap enough?
Oracle trades at roughly 18× earnings, in line with its ten-year average and far below the 45×-plus peak in 2025. Analysts' average target is $245, implying over 50% upside.
Bank of America analyst Tal Liani argues the valuation "already reflects balance-sheet challenges but has not fully priced in the revenue acceleration that AI data-center milestones could deliver."
Yet the 10-year Treasury yield has climbed to 4.85%, the highest since October 2023 — every tick higher in borrowing costs adds pressure to Oracle's debt-funded buildout model. Put simply = the stock looks cheap, but "cheap" only holds if the company can survive a three-year free-cash-flow hole.
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