Actions of Oracle (NYSE: ORCL) hit a new 52-week low of $121.50 on Friday. The cloud and database infrastructure company is now trading around 63% below its high of $345.72, and its market capitalization has dropped to around $365 billion.
The new low wasn’t even the worst news of the month.
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On July 9, S&P Global Ratings cut Oracle’s credit rating from BBB to BBB-, leaving the company one notch above junk status. The determining factor was the enormous cost of building the AI ​​(artificial intelligence) infrastructure that Oracle has subscribed to.
In short, the market is now treating Oracle’s AI opportunity as a balance sheet issue. But with the stock trading at roughly 16 times the earnings guidance it just guided for this fiscal year, it’s worth asking whether the fear has gone further than the facts warrant.
Image source: Getty Images.
What worries S&P
The figures behind the reduction are uncomfortable. Oracle spent $55.7 billion on capital expenditures in fiscal 2026 (the year ending May 31, 2026) as it rushed to build data centers for AI customers. The company generated $32 billion in operating cash flow, up 54% year over year, and still spent it all, posting free cash flow of negative $23.7 billion for the year.
S&P expects the gap to widen. The agency projects that Oracle’s capital expenditures in fiscal 2027 will reach between $90 billion and $95 billion, and expects the company’s free operating cash flow deficit to widen to about $42 billion. Oracle already had nearly $130 billion in borrowings at the end of fiscal 2026. And after issuing $5 billion in mandatory convertible preferred stock in February, the company plans another $20 billion stock issuance later this calendar year.
There is also a concentration problem. S&P noted that about half of Oracle’s $638 billion in remaining performance obligations (contracted revenue that Oracle has signed but not yet delivered) comes from a single customer: OpenAI. If the ChatGPT maker ever struggles to finance its commitments, Oracle could be left with data centers built for demand that never comes.
That, to me, is the most serious risk on the list.
The tension also manifests itself in orientation. Management expects revenue to increase about 34% this fiscal year, to $90 billion. But it guided for non-GAAP (adjusted) earnings per share of $8.05, about 18% growth once one-time investment gains are removed from the fiscal 2026 figure. That’s healthy, but still barely half the pace of revenue, because depreciation and interest are rising along with construction.
Demand is not the problem
Meanwhile, Oracle’s fiscal 2026 results were excellent. Revenue increased 17% year over year to $67.4 billion, and growth accelerated throughout the year, with fiscal fourth-quarter revenue increasing 21%. The company’s cloud infrastructure business, the part of Oracle that actually sells AI computing capacity, grew 93% year over year in the fiscal fourth quarter to $5.8 billion. And full-year net income under generally accepted accounting principles (GAAP) rose 37% to $17.1 billion.
The delay, leaving aside the risk of concentration, is extraordinary.
Remaining performance obligations ended the year at $638 billion, up 363% year over year and up $85 billion from the prior quarter alone. A year earlier, the figure was about $138 billion. In particular, about $75 billion of recent big AI contracts involve customers paying upfront for graphics processing units (GPUs) or supplying the chips themselves, a deal that removes some of the construction cost from Oracle’s books.
Then there is the price. With shares near $127 as of this writing, Oracle trades at about 22 times earnings and about 16 times adjusted earnings management just guided for fiscal 2027. However, that’s a multiple more commonly associated with slow-growing legacy software companies than a business targeting 34% revenue growth.
So, has panic boiled over? Partly, I think.
Fear itself is rational. Negative free cash flow, a credit rating one notch above junk, and half of the backlog in the hands of an unprofitable client are real risks. And the upcoming share issue will dilute existing shareholders. But at the current valuation, a lot of failures are already priced in, and if the backlog comes in as expected, earnings growth could react once the company puts the biggest expense behind it.
I’m not going to buy yet, because what would make these stocks work (confidence that OpenAI commitments will be converted into cash) is not something Oracle controls. However, for investors with strong stomachs who believe the demand for AI is durable, a small position could start to make sense at this price. I would consider changing my mind if free cash flow stops deteriorating sooner than expected, or if OpenAI’s funding continues to emerge quarter after quarter. Those two things matter more than the next rating action.
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Daniel Sparks and its clients have no positions in any of the stocks mentioned. The Motley Fool has posts and recommends Oracle. The Motley Fool has a disclosure policy.
Oracle just hit a new 52-week low and its credit dropped towards junk. Is the AI-Capex panic over? was originally published by The Motley Fool
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