Oracle Says Its Expiring AI Contracts Are Renewing 20% Higher

Oracle (NYSE:ORCL) reported its fiscal first-quarter results (the period ended Aug. 31, 2026) after the market closed Thursday, and investors couldn't seem to make up their minds. Shares jumped more than 8% early Friday before giving nearly all of it back.

The stock traded around $154 as of this writing, up less than 1% for the day. Its 52-week high is $329.50, more than double today's price.

The report had plenty of big numbers. Revenue came in about 30% higher than a year ago, at $19.3 billion, and management raised its full-year earnings outlook. But to me, the most important thing said Thursday was a disclosure from co-CEO Clay Magouyrk about what happens when Oracle's early artificial intelligence (AI) contracts expire. The capacity is rerenting at higher prices.

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Old chips are earning more, not less

The bear case against AI infrastructure rests on a simple worry: The graphics processing units (GPUs) filling data centers like Oracle's could lose their earning power within a few years, before the spending behind them ever pays off. On Thursday's earnings call, Magouyrk gave the strongest answer to that worry Oracle has offered yet.

"Of all the GPUs that came up for renewal in Q1, that capacity was renewed or resold at a 20% premium to prior contracts," he said. "The majority of those GPUs are 4 years or older. We see a long useful life with increasing value for the AI capacity we are deploying."

In other words, Oracle's oldest chips aren't aging out of the fleet. They are earning more than they did under their original contracts. And if that pattern holds, the hardware could keep producing revenue for longer than skeptics seem to assume. Every extra year of earning power improves the return on each dollar Oracle spends.

Demand supports the claim. After all, the company booked more than $30 billion of new AI contracts during the quarter, pushing remaining performance obligations (contracted revenue the company hasn't yet earned) to $664 billion.

An accelerating quarter

Showing how quickly the AI business is scaling, Oracle's cloud infrastructure revenue rose 121% year over year to $7.4 billion in fiscal Q1, faster than the fiscal fourth quarter's 93%. Across all of fiscal 2026, the rate was 77%. Management now expects revenue of at least $90 billion this fiscal year and raised its guidance for non-GAAP (adjusted) earnings per share to $8.10, up from $8.05 in June. Growth like that is what the stock's believers have been paying for, of course. The harder part is what all of it costs.

So where's the profit?

Capital expenditures reached $28.5 billion in the quarter (more than the $21.2 billion Oracle spent in all of fiscal 2025), and free cash flow was negative $5.4 billion. To help pay for the build-out, the company sold the full $20 billion of stock under its at-the-market program during the quarter, adding to its share count.

The margin payoff, however, hasn't arrived. GPU utilization was 97.9% in the quarter, according to Magouyrk, and renewal prices are rising. Yet chief financial officer Hilary Maxson said gross margin declined as expected as new data centers ramp up, and that Oracle still expects $90 billion to $95 billion in capital spending this fiscal year.

Lower operating costs did the offsetting for now. Non-GAAP operating income rose 31% year over year, almost exactly in line with revenue.

And the chips renewing at a premium today are the small, early slice of the fleet. Nearly all of the new spending is buying new-generation capacity, and its own renewal test may be years away.

Still, the valuation has deflated along with the price. At around $154, the stock costs about 19 times the $8.10 in earnings per share management now expects -- at its 52-week high, it fetched roughly 41 times those same expected earnings.

So, should investors buy the stock on that disclosure? I don't think so -- not yet.

In short, the renewal pricing is arguably the most convincing answer the company has given to the fear that AI hardware wears out before it pays for itself. But one quarter of renewals on a small early fleet isn't proof the model works at the scale Oracle is now spending, and I'm not buying the stock at today's price.

If those 20% premiums start showing up as an expanding gross margin while the spending plan holds, I'd give the stock another look. That evidence isn't here yet.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.