Oracle Just Revealed a Massive $638 Billion Backlog. Here's Why the Stock Fell Anyway.

Oracle (NYSE: ORCL) reported its results for the fiscal fourth quarter of 2026 (the period ended May 31) after the market closed on Wednesday, and by most measures, the report was excellent. Revenue rose 21% year over year to $19.2 billion, and the company's backlog of contracted future revenue swelled to a record $638 billion. Management also stood by its forecast for revenue to reach $90 billion in fiscal 2027 -- growth of about 34%. Yet shares of the cloud and database giant slipped about 7% in after-hours trading as of this writing.

So why would investors sell on numbers like these?

Part of the market's concern seems to center on what all of this growth costs. Oracle said it plans to raise about $40 billion in fiscal 2027 to help fund its artificial intelligence (AI) data center build-out -- on top of the $48 billion of debt and equity it raised in fiscal 2026.

Here's a closer look at the quarter, including the heavy spending required to make it happen.

Image source: The Motley Fool.

Demand keeps accelerating

Oracle's cloud infrastructure business, which rents out computing power (much of it used for AI training and inferencing) once again drove the results. The segment's revenue rose 93% year over year to $5.8 billion in the fiscal fourth quarter. And the quarter-to-quarter trend is arguably as impressive as the headline number. From 55% to 68% to 84% and now 93%, the segment's year-over-year growth rate accelerated in every quarter of fiscal 2026.

Total cloud revenue, which combines cloud infrastructure with the company's cloud applications, grew 47% to $9.9 billion.

And Oracle's profitability was notable, too. Its non-GAAP (adjusted) earnings per share rose 24% to $2.11. Even after excluding some one-time investment gains during the period, adjusted earnings per share grew 20%.

Then there's the backlog.

Oracle's remaining performance obligations (RPO) (contracted revenue the company hasn't yet delivered) grew by $85 billion in the quarter alone to $638 billion. Showing how staggering this figure is, the figure stood at about $138 billion a year earlier. And the backlog should start turning into revenue at a faster pace, with chief financial officer Hilary Maxson saying during the fiscal fourth-quarter earnings call that Oracle expects to recognize about 12% of its RPO as revenue over the next 12 months.

Management expects the momentum to continue, guiding for total cloud revenue to grow between 57% and 63% in constant currency in the fiscal first quarter of 2027. And CEO Clay Magouyrk said during the call that Oracle plans to bring nearly a gigawatt of computing capacity online in the current quarter -- about as much as the company added during all of fiscal 2026.

Paying for all of that growth

But building data centers at this pace is extraordinarily expensive.

Oracle's capital expenditures totaled $55.7 billion in fiscal 2026 -- more than two and a half times what it spent a year earlier. So even though the company's operating cash flow jumped 54% to $32 billion, free cash flow for the year was negative $23.7 billion.

To support these capital expenditures, Oracle raised $43 billion in debt and $5 billion in equity during fiscal 2026, and its interest expense for the year climbed 29% to $4.6 billion.

Notably, the roughly $40 billion the company plans to raise in fiscal 2027 includes its previously announced $20 billion at-the-market equity program (a plan to gradually sell newly issued shares, which dilutes existing shareholders).

Customers are helping shoulder some of the load, however. Oracle said the prepaid and customer-supplied hardware portions of its large AI contracts now total $75 billion.

"This substantially reduces the amount of capital Oracle must raise to build out our AI datacenters," the company said in its fiscal fourth-quarter earnings release.

Still, most of the recent backlog growth came from a small number of enormous AI contracts, including a reported $300 billion, five-year agreement with OpenAI signed last year. The ChatGPT maker reportedly remains unprofitable, and it filed confidential paperwork for an initial public offering just days before Oracle's report. If a customer of that size were ever unable to pay for the computing it has contracted, a meaningful piece of Oracle's backlog may never become revenue.

So, what should investors make of the pullback?

Following the after-hours dip, the stock's forward price-to-earnings ratio sits at about 24. For a company growing this quickly, that valuation arguably looks reasonable.

I think the market's hesitation is understandable, though. Oracle is borrowing and issuing stock at a scale few companies ever have, and the payoff depends on customers honoring some of the largest contracts in the technology industry's history. The demand is clearly there. But until free cash flow returns to positive territory, the stock could remain volatile. After all, when a company spends this aggressively, investors may want more proof before paying up for the growth.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.