The AI bubble theory hasn't dissipated, and Oracle's stock price has already halved: Can a good earnings report tonight save it?

Oracle is facing an especially challenging earnings season. Amid ongoing market concerns over AI capital expenditures, this enterprise software giant finds itself in a dilemma—increasing spending worsens debt and cash flow pressures; cutting back raises new questions about its competitive strategy.

Since hitting a record high on September 10 last year, Oracle’s stock has fallen 54%, making it the worst performer among S&P 500 components over the same period. The last time Oracle experienced a decline of over 50% was during the dot-com bubble burst, and it took years to fully recover.

After the market closes on Tuesday, Oracle will report its third-quarter results. According to Bloomberg consensus estimates, EPS is expected to grow about 30% year-over-year, revenue about 20%, and cloud infrastructure sales could jump 82%. However, capital expenditures for fiscal 2026 are projected to exceed $50 billion, with free cash flow remaining negative—these figures make investors hesitant to buy even with strong earnings.

“This is a dilemma,” said Peter Andersen, CIO of Andersen Capital Management, which manages about $4.5 billion. He pointed out that if Oracle maintains high AI spending, it could raise concerns about leverage and balance sheet health; if it cuts back, the market may question its ability to compete against large rivals.

Good earnings don’t necessarily lead to good results: Microsoft and Amazon have set precedents

Microsoft and Amazon provide the most direct reference points for Oracle. Both companies recently reported better-than-expected quarterly results, yet their stocks were sold off after earnings due to worries over AI capital spending. The market logic is clear: in the current sentiment, strong growth figures are insufficient to offset fears of capital consumption.

Despite Oracle’s cloud infrastructure sales expected to grow 82% YoY, the market may pay more attention to management’s outlook on future capital spending. In a climate already highly alert to AI narratives, any signals of above-expected expenditure could be amplified.

Peter Andersen said he currently does not hold Oracle shares, but if the company cuts capital spending and the stock continues to decline, he would consider buying. This reflects the current market’s contradictory psychology—good news struggles to drive buying, while bad news can trigger selling.

Cash flow under pressure: the weight of $50 billion in capital spending

Oracle’s aggressive bet on AI infrastructure is rapidly deteriorating its financials. Last quarter, free cash flow was about negative $10 billion, a record low; this quarter, it’s expected to remain around negative $7.3 billion. For fiscal 2025, Oracle will see its first negative free cash flow since 1990, and this situation is expected to persist at least through fiscal 2028.

Regarding capital expenditures, Oracle expects to spend over $50 billion in fiscal 2026 (ending May this year), more than doubling the previous year; by fiscal 2029, this figure could surpass $85 billion. To fund its cloud infrastructure expansion, the company plans to raise up to $50 billion this year through a combination of debt and equity.

These pressures have already sent warning signals in the credit markets. Oracle’s 5-year credit default swap (CDS) spreads recently hit levels not seen since January 2009, reflecting heightened market concern over its leverage risk.

Brian Mulberry, portfolio manager at Zacks Investment Management (which holds Oracle stock in multiple portfolios), said:

“The market is evaluating whether these debt loads and expenditures will lead to future growth. That concern must be taken seriously. As long as Oracle can demonstrate that spending ultimately translates into positive cash flow and profits, I believe it can withstand it, but ongoing vigilance is necessary.”

Project setbacks and layoffs: AI expansion faces uncertainties

Oracle’s AI expansion plans have recently encountered new uncertainties. Last week, media reports indicated that Oracle and startup OpenAI have shelved plans to expand their flagship AI data center in Texas, citing funding issues and OpenAI’s changing needs.

Meanwhile, reports suggest the company also plans to lay off thousands of employees to manage costs associated with AI development.

It’s also noteworthy that Oracle’s upcoming quarterly earnings will influence a major deal: Paramount Skydance’s $111 billion acquisition of Warner Bros. Discovery. Oracle Chairman Larry Ellison has personally pledged $45.7 billion in equity via a trust fund that primarily holds Oracle stock, as part of this transaction.

Valuation has fallen back to historical averages, with analysts seeing buying opportunities

One side effect of this recent plunge is that Oracle’s valuation has returned to a more reasonable range. Based on expected earnings, the current P/E ratio is about 19, well below the over 45 seen in September last year, and close to its 10-year average of 17, making it more attractive.

Wall Street analysts generally remain optimistic. The 12-month average target price for Oracle is around $260, compared to Monday’s close of about $152, implying an upside of approximately 71%—one of the highest implied returns since 2003.

Jefferies analyst Brent Thill wrote in a March 5 report: “We believe the market may be underestimating Oracle’s upside potential and growth catalysts. This presents an attractive entry point, supported by a story of accelerated growth, high-margin core software, and relatively low long-term AI erosion risk.”

Brian Mulberry echoed a similar view, stating:

“Market enthusiasm for AI spending has waned, but as long as data centers continue to be built, we remain confident in growth prospects. As the stock’s momentum is digested, true value is emerging—this is a buying opportunity.”

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