Oracle Corporation (ORCL) saw its shares plummet more than 9% in premarket trading on Thursday, dropping to $182.95, as the market focused on the company's massive capital expenditure plans for artificial intelligence infrastructure rather than its record cloud revenue growth. The selloff came despite a strong fiscal fourth-quarter report that highlighted surging demand for Oracle's cloud services.
Record Cloud Revenue but Soaring Capex
For fiscal 2026, Oracle reported total revenue of $67.4 billion, slightly above its earlier guidance of $67 billion. Cloud revenue was a standout, rising 47% year-over-year to $9.9 billion in the fourth quarter alone. Oracle Cloud Infrastructure (OCI), the company's infrastructure-as-a-service business, surged 93% to $5.8 billion, while its cloud applications segment grew 10% to $4.1 billion. However, the spotlight quickly shifted to the company's spending. Capital expenditures for fiscal 2026 reached $55.66 billion, more than double the $21.22 billion spent in the prior year and significantly above the $50 billion target set in March. This aggressive investment left free cash flow in negative territory at negative $23.7 billion, even as operating cash flow hit a record $32.0 billion.
Investors Question the AI Payoff
Wall Street has been increasingly scrutinizing AI-related companies beyond the semiconductor space, demanding evidence that AI demand can translate into free cash flow rather than just a growing backlog. Oracle's remaining performance obligations (RPO) climbed to $638 billion, a 363% increase from the previous year, but investors are concerned that the heavy spending on AI data centers may not generate revenue quickly enough to justify the costs. The company's fiscal 2027 capital spending plans added to the unease. CFO Hilary Maxson indicated that Oracle expects to spend around $70 billion of its own capital in fiscal 2027, with an additional $20 billion to $25 billion expected to be reimbursed by customers. This could push total reported capex as high as $95 billion, far above the $67.66 billion analysts had anticipated, according to LSEG data cited by Reuters.
Stargate and the AI Race
Oracle is positioning itself as a key player in the AI infrastructure race, moving beyond its traditional software business to compete with cloud giants like Amazon Web Services and Microsoft Azure. The company is working on the massive Stargate data center project in Texas alongside OpenAI and other partners, with the site expected to be over 75% complete within the next 90 days. OpenAI has also made its advanced coding models available on Oracle's cloud. CEO Clay Magouyrk emphasized that the company's delivery pace is accelerating, with Oracle approaching one gigawatt of capacity in the first fiscal quarter alone.
Software Decline and Market Risks
While cloud revenue booms, Oracle's traditional software business continues to shrink as customers migrate to the cloud. Software revenue fell 2% to $6.8 billion in the quarter. The shift to a capex-heavy cloud model also introduces new risks. Jacob Bourne, an analyst at eMarketer, noted that while demand for AI is real, the funding question is becoming more difficult. Oracle faces potential headwinds including supply chain issues for technology components, data center scaling challenges, cybersecurity threats, rising debt costs, and the dilutive impact of new equity offerings. The company plans to raise approximately $40 billion through debt and equity in fiscal 2027.
Outlook and Next Test
Oracle guided for fiscal first-quarter revenue growth of 27% to 29%, with cloud revenue expected to jump 58% to 64% in U.S. dollars. The company expects to recognize about 12% of its $638 billion RPO, or roughly $76.56 billion, over the next year. Investors will be watching closely to see if that backlog begins to convert into revenue and positive cash flow, which could restore confidence in the AI narrative. For now, the market remains cautious, weighing Oracle's ambitious spending against the potential for long-term gains in the rapidly evolving AI landscape.
