The earnings report "Judgment Day" is approaching! After the internet bubble, Oracle (ORCL.US) faces the "cut-off line" test once again

Zacks Investment Research reports that among the growing skepticism toward AI, no stock has been hit harder than Oracle (ORCL.US). Moreover, the upcoming earnings report may not change this sentiment.

Since reaching a high on September 10 last year, Oracle’s stock has fallen 54%, making it the worst performer in the S&P 500 during that period; this year alone, it has declined 22%, ranking among the 25 weakest stocks in the index. The last time Oracle experienced a decline of over 50% was during the dot-com bubble burst, when it took years to fully recover.

The current stock market is highly focused on various risks—from AI spending and industry disruption to the Iran war—Oracle’s Q3 earnings report, scheduled after Tuesday’s close, faces investors who are eager to find reasons to sell.

Peter Anderson, Chief Investment Officer at Anderson Capital Management, said, “It’s now in a ‘dilemma’ situation,” overseeing $4.5 billion in assets.

The enterprise software company expects to report about 30% earnings growth and 20% revenue growth. Consensus forecasts project an 82% surge in sales of its cloud infrastructure business.

Typically, this would be positive for Oracle’s stock, but if investors believe its capital expenditure plans are too aggressive, the stock could still be punished. This is similar to what happened with cloud giants Microsoft and Amazon—they reported better-than-expected results but faced selling pressure due to concerns over AI spending.

Anderson said, “If it continues to spend heavily as it is, especially amid rising doubts about AI capital expenditure, it could raise questions about its leverage, cash burn, and balance sheet strength. On the other hand, if it cuts back on spending, it could trigger new doubts about its strategy and ability to compete with larger rivals.”

Anderson currently does not hold Oracle shares, but he said he would consider buying if the company reduces capital spending and the stock continues to fall.

Oracle’s capital expenditure is expected to exceed $50 billion in fiscal 2026 (ending in May), more than double last year’s spending. It is forecasted to surpass $85 billion by fiscal 2029.

This spending comes at a cost. According to aggregated data, the company reported nearly $10 billion in negative free cash flow last quarter, its worst ever, with an estimated negative $7.3 billion in the upcoming report. Fiscal 2025 marked the first time since 1990 that Oracle experienced negative free cash flow, a situation expected to persist at least through fiscal 2028.

Due to financing issues and changing demands from OpenAI, Oracle and OpenAI have canceled plans to expand their flagship AI data center in Texas. Additionally, the company is reportedly planning to lay off thousands of employees to control costs associated with AI expansion.

To expand its cloud infrastructure capacity, Oracle plans to raise up to $50 billion this year through debt and equity sales. Reflecting leverage risks, Oracle’s five-year credit default swap (CDS) recently hit its highest level since January 2009.

Heavy investment in AI is expected to negatively impact cash flow

Bryan Malberry, Portfolio Manager at Zacks Investment Management, said, “The market is evaluating whether this debt burden and spending will lead to future growth, and these concerns must be taken seriously,” noting that Zacks holds Oracle stock in multiple portfolios. “As long as Oracle can demonstrate that its spending ultimately converts into positive cash flow and contributes to profitability, I believe it’s tolerable, but it remains an indicator to watch.”

Oracle’s investors are not the only ones eager to see how the stock reacts to earnings. The move will also impact Paramount’s deal to acquire Warner Bros. Discovery for $111 billion, with $45.7 billion of the equity backed by a trust established by Oracle Chairman Larry Ellison.

A recent positive effect of Oracle’s stock sell-off is that its valuation has become more attractive. The current price is about 19 times expected earnings, well below the over 45 times high in September and close to its 17 times ten-year average.

Of course, some believe the decline has gone too far. Analysts’ 12-month average target price for Oracle is nearly $260, while the stock closed around $152 on Monday, implying Wall Street sees a 71% upside over the next year. Data since 2003 shows this is the highest implied return in the stock’s history.

J.P. Morgan analyst Brent Thill wrote in a March 5 report, “We believe the market may be overlooking Oracle’s upside potential and growth catalysts,” adding, “We see an attractive opportunity driven by rare growth re-acceleration, high-margin core software, and lower long-term AI erosion risk.”

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Malberry from Zacks believes that as long as demand for AI products remains strong, the stock should be attractive.

“The market’s optimism about AI spending has indeed been exhausted, but as long as data centers are still being built, we remain confident in growth forecasts,” he said. “The momentum in the stock has been squeezed out, and we are beginning to see real value. I think this is a buying opportunity.”