Oracle Stock Jumps After Earnings as $664 Billion AI Backlog Puts $165 Back in Focus

TradingKey - Oracle had a better fundamental setup for Sept. 11th after fiscal Q1 results. Market concern around AI spending was alleviated when Oracle beat revenue expectations with $19.3B, adjusted EPS of $1.92, a 121% increase in OCI revenue, and a record high remaining performance obligation of $664B. The primary fundamental change is not the speed of cloud growth, but the structural changes being made by Oracle. Oracle uses customer prepayments and the bring-your-own-hardware contracts to build out the AI within their own balance sheet.

Q1 Revenue and Earnings Beat Expectations

Oracle reported fiscal Q1 revenues of about $19.3 billion, representing 30% growth and outpacing Wall Street’s expectations. Adjusted EPS came in at $1.92 versus about $1.74, and GAAP EPS increased to $1.56.

Operating performance also improved. GAAP operating income came in at $6.7 billion, and non-GAAP operating income was $8.2 billion. Oracle came into this report facing pressure to address the massive capital expenditures related to new data centers and begin to demonstrate that this spending had begun to generate real operating leverage.

OCI Growth Reached 121%

Cloud continues to dominate. Total cloud revenues came in at $11.6 billion, up 62% year over year, with Oracle Cloud Infrastructure revenues recording a 121% increase, coming in at $7.4 billion.

Oracle also installed 850 megawatts of additional capacity during the quarter. This is clearly important because Oracle can do little with a large contracted backlog unless Oracle can turn this contracted demand into usable capacity and recognized revenues.

Software revenue decreased 3% as customers moved away from on-premise products towards Oracle’s cloud. This shows how drastically the business mix can change.

$664 Billion Backlog Changes the Revenue Visibility Story

The most important forward indicator was remaining performance obligations, which rose to $664 billion, after Oracle signed more than $30 billion of new AI cloud contracts during the quarter.

Management believes that around half of this backlog will convert to revenue within the next 36 months. I find this the most interesting part of the report as the construct of the conversation has shifted and the question is not whether Oracle will land major AI contracts, but whether the company will develop the capacity to fulfill these contracts.

Customer Funding Reduces the Capital Burden

One positive among many is the way customers are pre-funding recent contracts. Oracle noted that recent AI contracts tend to use customer pre-funding, customer-supplied hardware, or other structures that significantly reduce Oracle's upfront capital requirement.

For Q1, capital expenditure was approximately $28.5 billion, but approximately $11.36 billion was offset by customer prepayments. That significantly improves the economics compared to a situation where Oracle is obligated to fund everything, including each GPU, server, and data center.

Although Oracle signed a significant block of AI contracts, the company maintained its strategic objective of investing in capex of roughly $90 billion to $95 billion for the year. This implies that the company believes it can accommodate more AI demand without increasing its own capital requirement proportionally.

Free Cash Flow Was Negative, but Better Than Feared

Free cash flow was negative at about $5.4 billion, but was much better than the expected $9.56 billion deficit.

Although cash flow remains a challenge to Oracle, the customer pre-funding has significantly improved the cash flow risk. The funding outflow was less than expected and combined with stronger operating cash flows, it reduced the risk of an AI contract funding obligation requiring significant debt funding and major CapEx.

Guidance Improved

Oracle increased its adjusted EPS expectation for fiscal 2027 to at least $8.10 from $8.05, and maintained its expectation of at least $90 billion annual revenue. Management is also more optimistic for the current quarter, with expected revenue growth of 30% to 34% and adjusted EPS of $1.85 to $1.93.

The earnings upgrade marks an important incremental improvement. The upgraded earnings forecast indicates that AI demand is shifting from delivering long-future earnings to present-period revenue recognition.

Debt and Execution Risks Remain

Improved quarter or not, balance sheet risk still applies to Oracle. Capex remains high, pressure on credit ratings has increased and an uptick in Treasury yields has made it more expensive to fund the necessary infrastructure.

The other significant risk is execution. Delays in power, hurdles in permitting, construction and challenges in labor have the potential to slow the conversion of Oracle’s backlog to revenue. The first quarter of the year bringing 850 MW online is a positive sign, but in order for the $664 billion pipeline to be significant, Oracle must continue adding capacity at a rapid pace.

Oracle Technical Analysis: Earnings Move Puts $157.09 Back in Focus

The last completed regular session Oracle traded around $155 on September 10. The supplied 2-hour chart shows the pre-earnings pullback trading around $153.08. The pre-earnings setup is useful, but as ORCL traded about 4% higher in extended trading after earnings, the earnings reaction changed the setup.

Oracle Stock Price Chart - Source: Tradingview

Prior to earnings, $150.12-$149.47 was key support. This is the most important downside area as the post-earnings gap fades.

The first regular session target trading above this level is $157.09. A sustained hold above this level would draw focus to $161.06. Beyond this level $165.31 would be the next major resistance level and $170.79 would be the next major resistance level.

RSI on the chart was at 44 and below its signal line at 63, signaling that momentum was weak prior to earnings. The gap trading higher would quickly change this and the regular session trading on Friday takes precedence over pre-earnings RSI.

Key Levels

·       Latest closed level: Around $155

·       Post-earnings extended-hours area: Around $164

·       Breakout confirmation: $157.09

·       First upside level: $161.06

·       Major resistance: $165.31

·       Higher target: $170.79

·       Key support zone: $150.12-$149.47

·       Secondary support: $143.89

·       Deeper support: $137.29

Why is Oracle stock in focus now?

Oracle beat estimates for the first quarter. OCI growth was 121%. RPO reached $664 billion and free cash flow was better than expected. The main reason for the increase is that customer prepayments and customer-supplied hardware are now reducing the upfront capital burden for new AI contracts.

What level confirms further ORCL upside?

A regular session hold above $157.09 would confirm that the post-earnings gap is filled by buyers, and continue to focus on $161.06 and $165.31, and $170.79 as a larger target.

Bottom Line

Oracle's report for the first quarter has significantly strengthened the case for the bulls. Triple digit OCI growth, a $664 billion backlog, and better funding structures show that the building of AI is starting to show revenue as well as better capital efficiency. The main concerns remain high capex, debt, credit and the execution of infrastructure. From a technical standpoint, the earnings gap has overcome the pre-report chart. I have a constructive view as long as $149.47 holds, but the key consideration is if ORCL can trade above $157.09 and clear $165.31 during regular sessions.