Oct 1 2026 • Research

Oracle (ORCL): Selling Shovels on Credit

Introduction

Oracle has spent the past three years converting itself from a mature database vendor into the fourth-largest AI hyperscaler behind AWS, Azure and Google Cloud, although the equity market remains unconvinced. Shares traded under $150 in September 2026, down 52% from their highs a year ago, despite fiscal Q1 2027 revenue growing 30% and Oracle Cloud Infrastructure (OCI) revenue growing 121%.^[1][2] Leverage, counterparty concentration, depreciation and, most recently, the physical delivery of capacity remain the core concerns for investors.

The Market

Oracle sells cloud (IaaS plus SaaS), software licences and support, hardware and services. In fiscal Q1 2027 (Jun to Aug 2026) cloud reached 60% of revenue at $11.6 billion: with OCI (IaaS) making up $7.4 billion, and applications (SaaS) forming the remaining $4.2 billion. Legacy software made up $5.5 billion, down 3%, reflecting a shift away from its legacy business.^[1]

The moat lies in two key spots. Oracle Database has topped the DB-Engines ranking every month since 2012 and carries severe switching costs for mission-critical ERP workloads.^[3] Oracle made that lock-in portable rather than defending it, which evident in its multicloud database revenue growing 353% and multicloud customers up 180%.^[4]

The second moat is operational: Oracle's GPU pool ran at 97.9% utilisation in Q1, and expiring capacity renewed at a 20% premium.^[4]

Oracle competes in a cloud infrastructure market worth almost $129 billion a quarter and growing 35%, with OCI holding about 3% market share against market leader AWS at 28%.^[3] OCI's path therefore runs through taking share, since the market cannot be relied on to keep growing at its current pace.

The Financials

For Oracle, revenue growth has inflected, with profitability following close behind. However, free cash flow has not, as rising capital expenditure outruns a strong operating cash flow, and this remains the main point of contention for investors.

Q1 FY27 delivered $19.35 billion of revenue, with GAAP operating income up 57% to $6.73 billion and GAAP EPS up 55% to $1.56.^[1] Gross margin fell to 60% on rising datacentre depreciation, while sales, marketing and R&D costs fell, keeping operating margin flat.

Although Q1 operating cash flow came in at a record high of $23.1 billion, up 184%, it was outrun by $28.5 billion of capex, leaving free cash flow at negative $5.4 billion.^[1]

The Balance Sheet and Mounting Debt

Oracle carries $125 billion in borrowings, $7.6 billion current and $117.7 billion non-current, against $37 billion of cash and marketable securities and $67 billion in equity.^[1] Adding $30.6 billion in non-current lease liabilities that fund datacentre shells takes obligations to $156 billion, and on a lease-inclusive basis total debt is $169 billion, or 4.9x trailing EBITDA.^[1][2] Quarterly interest expense sits at $1.43 billion, up 55%.^[1] S&P downgraded Oracle’s credit rating to BBB- in July 2026, one notch above high yield, with Moody's keeping it on negative outlook.^[6][7]

The short-term liabilities remain manageable. Oracle repaid $4.2 billion in notes and term loans in Q1 from $23.1 billion of operating cash flow.^[1] The risk is the cost of continuous issuance rather than a maturity cliff. Oracle plans roughly another $40 billion of debt and equity issuance in FY27.^[8] Its 10-year bonds already yield close to 6.4% against 5.7% for the BBB curve, a sign of the market's weakening faith in the company's creditworthiness.^[9] A high-yield downgrade would force index-driven selling, and every 100 basis point on the $125 billion of borrowings costs Oracle another $1.25 billion pre-tax, or nearly $0.35 of EPS as debt refinances. The strain is visible at the project level too, with the debt financing the New Mexico Project Jupiter campus trading below 90 cents on the dollar.^[23]

Oracle’s Backlog Quality

A key bullish note for Oracle is its sizable backlog, or Remaining Performance Obligations (RPO). Oracle’s RPO of $664 billion is 9.3x its trailing revenue, with roughly $300 billion of it tracing to OpenAI.^[1][10] The remaining $364 billion spreads across a wider base, with AMD, Meta, NVIDIA, TikTok and xAI among its largest OCI customers, which lends credibility to the non-OpenAI book.^[8][11]

Oracle's own 10-K is candid: "In certain OCI offerings, we are more concentrated among a number of large customers," and some "may be highly leveraged".^[12] RPO is contracted revenue, not collected cash, and termination terms are not disclosed contract by contract. September's force majeure notice on Project Jupiter shows those clauses working in Oracle's favour against a developer, but tells us nothing about what recourse its own customers hold if contracted capacity arrives late.^[23] There are mitigating factors, however: Q1's $30 billion in new bookings came via prepayments and bring-your-own-hardware deals, and $11.4 billion of prepayments landed in operating cash flow.^[1][4] Both shift a significant share of the risk from Oracle to its customers.

Power and Silicon

Physical capacity has become the sector's limiting input, and September brought the first hard evidence that Oracle is not entirely ahead of it.

On 24 September 2026, Oracle sent a force majeure notice to Blue Owl Capital, the developer of Project Jupiter, its 2.45GW Stargate campus in Doña Ana County, New Mexico.^[23] An Energy Transfer pipeline serving the site has been delayed nearly six months to February 2027 after regulators repeatedly denied permits, and a state air-quality decision on its fuel cells is due 23 November.^[23][24] ORCL shares fell 4% on the news. Oracle maintains that the site remains on schedule and that neither it nor its companion site affects FY27 revenue or earnings guidance. Blue Owl says the financial commitments are unchanged. Taken together, the notice reads as contractual insurance against a possible 2028 delay.^[23][24]

Previously, Oracle had announced that it had secured about 10GW of power through fiscal 2029 against the 8.1GW requirement of the Stargate buildout.^[13] However, Project Jupiter accounts for roughly 30% of that build, which is where the problem lies: securing power on paper and energising it are different problems, and the second one now has a live counterexample.^[23] In Q1 FY27 alone, Oracle delivered 850MW carrying over 300,000 GPUs, almost three times FY26's quarterly average (1.16GW across the full year), with the first Vera Rubin systems shipping in Q2.^[1][4][13] Utilisation of 97.9% means new capacity starts earning as soon as it comes online, which argues against idle-asset risk. Oracle still flags both constraints, warning that power limits "could disrupt operations" and that accelerator supply may force "less favorable terms with suppliers".^[12] Project Jupiter shows that the binding constraint sits with regulators and pipeline operators, beyond Oracle's direct control, which makes it harder to manage.

Earnings Quality: Depreciation

Oracle depreciates servers over six years, extended from five years with effect from fiscal 2025, a change that cut Q1 FY25 operating expense by $197 million and added $0.06 to quarterly EPS.^[14] Six years matches Microsoft and Alphabet and exceeds both Meta's five and a half and the five years Amazon reverted to for part of its fleet.^[15]

This assumption has a material impact on Oracle's financials. Q1 FY27 depreciation was $3.16 billion, up 134%, annualising near $12.6 billion on a base that is still growing.^[1] If competitive life proves to be closer to four years, server depreciation rises by half: $4.4 billion to $5.1 billion of extra pre-tax charge, taking $1.22 to $1.40 off Oracle’s EPS against guided EPS of $8.10. Oracle counters that older GPUs keep earning and even resell at a premium.^[4]

Valuation

On the valuation front, Oracle trades at 21.6x trailing and 16.2x forward earnings on a $417 billion market capitalisation and roughly $549 billion enterprise value, giving 7.6x EV/sales and 15.9x EV/EBITDA.^[2] Alphabet trades near 22.9x and Microsoft near 23.3x CY2027 earnings, so Oracle sits at a discount to two peers whose cloud infrastructure businesses are growing more slowly than OCI.^[16] That discount compensates for negative free cash flow and its BBB- rating.

But perhaps for a company like Oracle, multiples are the wrong tool for valuation. In Oracle’s case, the valuation plays out in a largely binary fashion: either Oracle converts the backlog and repays its debt, or it fails and the leverage comes back to bite. Against management's FY2030 framework of $225 billion in revenue and roughly $21 EPS, the stock sits near 6.6x terminal earnings, and the consensus price target across 43 analysts is $238.27.^[17][2] Both assume the backlog converts, and ROIC of 11.3% against a WACC near 10.7% means Oracle barely earns more than its cost of capital, although this gap should widen once its capex starts to pay off.^[2] Scenarios are a better approach.

The asymmetry favours the buyer at the current market price. The bear case lands near the current price, because the non-OpenAI backlog and the software annuity survive even if the OpenAI tranche fails. That skew is a point in favour of owning the stock, though Project Jupiter is a reminder that the bear case has drawn closer because it has become more likely.

Management and Execution

Clay Magouyrk and Mike Sicilia became co-CEOs in September 2025, with Safra Catz moving to executive vice chair.^[18] Magouyrk, 39, joined from AWS in 2014 and built OCI Gen2, so the company's biggest bet is now run by the person who designed it. Both CEOs reach 80% vesting only in 2029 on packages estimated at $350 million tied to revenue and share price.^[19]

Execution is where the strain shows. Oracle cut roughly 21,000 roles in FY26 at a restructuring cost near $2.8 billion, with a further round on 14 September 2026.^[20] Legacy software is declining and SaaS growth has slowed to 10%, so the equity story rests almost entirely on OCI.

Upcoming Catalysts

Investor day, October 2026. Alongside Oracle AI World (25 to 28 October), management has promised the first detailed disclosure of how the backlog converts and where OCI unit margins sit.^[4][21]
Free cash flow inflection. FY27 capex is guided to $90 billion to $95 billion gross, capped at $70 billion net of prepayments; the gap should narrow through FY28.^[4]
OpenAI funding round. According to multiple sources, OpenAI investors have approached the company with proposals for a new funding round at a valuation of $1.2 trillion.^[22] A raise would erase doubts about OpenAI's ability to meet its obligations to Oracle, bolstering the bull case.
Project Jupiter permits. A New Mexico air-quality decision on the site's fuel cells is due 23 November, and the pipeline serving it is now scheduled for 1 February 2027. Both test whether the force majeure notice proves precautionary or predictive.^[23][24]

Conclusion

Oracle is a fast-growing asset trading at a discounted multiple, weighed down by financing and counterparty risk while demand holds firm. Utilisation, delivery pace, secured power and the non-OpenAI backlog support the bull case, while the debt stack, OpenAI concentration, the depreciation assumption and now the pace of bringing sites online hold it back. How it resolves rests on two core future events: whether AI infrastructure spending holds at current intensity, and whether management delivers capacity on schedule without further dilution.

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This research is provided for informational and educational purposes only and does not constitute financial, investment, legal, or other professional advice, or a recommendation to buy, sell, or hold any security or financial instrument.

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The information and analysis presented are based on sources believed to be reliable but may contain errors, omissions, estimates, or forward-looking statements. No representation or warranty is made as to the accuracy or completeness of the information.

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CompanySep 29 2026

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