Oracle Isn't Done Spending Big on AI. Here's Why It Said Investors Shouldn't Worry.
Key Points
Oracle's massive capital expenditures have taken a sledgehammer to its free cash flow.
Upfront customer payments and efficiency improvements should slow the rate of cash burn.
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Few companies are capturing the high-octane growth potential of artificial intelligence (AI) more than Oracle (NYSE: ORCL) at the moment. Oracle has taken a cash-fueled battering ram and slammed it into Amazon, Microsoft, and Alphabet's seemingly impenetrable cloud infrastructure fortress. The strategy is working, as Oracle is rapidly growing its AI revenue.
But it comes at a steep cost, as Oracle's cash burn has evolved from a harmless scented candle to a full-blown bonfire.
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Here's why Oracle is confident that its costs are manageable, and whether the growth stock is a buy now.
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A leveraged bet on AI
In just one year, Oracle has gone from free-cash-flow-positive to bleeding tens of billions of dollars per quarter -- showcasing the severity of its spending spree.
|
Metric |
Q1 FY 2025 |
Q2 FY 2025 |
Q3 FY 2025 |
Q4 FY 2025 |
Q1 FY 2026 |
Q2 FY 2026 |
Q3 FY 2026 |
|---|---|---|---|---|---|---|---|
|
GAAP operating cash flow |
$19.1 billion |
$20.3 billion |
$20.7 billion |
$20.8 billion |
$21.5 billion |
$22.3 billion |
$23.5 billion |
|
Capital expenditures |
($7.9 billion) |
($10.7 billion) |
($14.9 billion) |
($21.2 billion) |
($27.4 billion) |
($35.5 billion) |
($48.3 billion) |
|
Free cash flow |
$11.3 billion |
$9.5 billion |
$5.8 billion |
($394 million) |
($5.9 billion) |
($13.2 billion) |
($24.7 billion) |
Data source: Oracle. GAAP = generally accepted accounting principles. Oracle's fiscal year ends on May 31.
Oracle's numbers look bad because capital expenditures (capex) are going toward building data centers that provide long runways for revenue growth. But in the meantime, they're a drain on cash flow. The simplest way for Oracle to return to FCF-positive territory would be to pause its expansion and give operating cash flow time to catch up.
Oracle is aggressively building these data centers because customers are lining up at the door for cloud space, as Oracle exited its latest quarter with a record backlog of $553 billion in remaining performance obligations.
When asked about its fiscal 2027 capex on its March 10 third-quarter fiscal 2026 earnings call, management didn't provide a clear answer, but it did say that if capex is higher, it won't require more cash from Oracle because of its new pricing model, which charges customers up front.
"A combination of bring-your-own-hardware and upfront customer payments enables us to continue expanding without any negative cash flow from Oracle Corporation," said Clay Magouyrk, Oracle co-CEO and head of OCI, on the earnings call.
In addition to shifting its business model to protect its cash flow, Oracle also shared numerous efficiency updates that will help lower costs and boost margins, including standardizing its data centers, improving its supply chain, tripling its manufacturing sites to increase its output, reducing time to delivery, and spreading fixed costs over a large base to improve margins. Oracle achieved a 32% gross margin on the AI capability delivered in its latest quarter, above its long-term guidance of 30%. Its database services are even higher-margin.
Oracle remains a risky bet
Oracle is a buy for investors who believe in the competitive advantages of its cloud offering and that its debt is manageable as it converts its order backlog into realized revenue.
But if you have a lower risk tolerance, it may be better to go with one of the FCF-positive cloud giants or chip companies like Nvidia and Broadcom as catch-all ways to benefit from AI adoption.
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Daniel Foelber has positions in Nvidia and Oracle and has the following options: short March 2026 $240 calls on Oracle. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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