Oracle’s Debt Dilemma: Cloud Ambitions Weigh on Financial Health

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Oracle is making an aggressive push to expand its cloud infrastructure to capitalize on the AI era, but this strategic move comes with significant financial strain. Mounting debt, persistent negative cash flow, and the withdrawal of a key financing partner have cast a shadow over the company's stock. This stands in stark contrast to its operational success, where cloud revenue is surging and its order backlog has reached unprecedented levels. How are investors to reconcile these opposing narratives?

The company's operational performance continues to impress, particularly within its cloud division. For its fiscal second quarter of 2026, reported on December 10, Oracle posted strong results:

• Total revenue reached $16.1 billion, marking a 14% year-over-year increase.
• Cloud revenue stood at $8.0 billion, growing by 34%.
• Infrastructure-as-a-Service (IaaS) revenue jumped 68% to $4.1 billion.
• Adjusted earnings per share came in at $2.26, a 54% gain.

A key indicator of future revenue, Remaining Performance Obligations (RPO), soared by 438% year-over-year to $523 billion. This massive backlog, largely tied to cloud services, points to exceptionally full order books. However, a significant portion is concentrated with a handful of clients, most notably OpenAI, which accounts for approximately $300 billion of the total backlog.

The Soaring Cost of Expansion

The driver behind the recent investor concern is the immense capital required to fuel this growth. Oracle has significantly raised its investment outlook, now forecasting capital expenditures of $50 billion for the current fiscal year. This figure far exceeds market expectations of around $35 billion and reflects the accelerated pace of data center construction.

This spending spree is directly impacting the balance sheet:

• Total debt, including lease liabilities, has risen 40% year-over-year to $124 billion.
• Free cash flow was negative for the third consecutive quarter.
• Capital expenditures in Q2 tripled compared to the prior year to $12 billion.
• The company also carries substantial off-balance-sheet lease commitments of $248 billion.

This combination of high leverage, recurring negative cash flow, and customer concentration has altered the risk perception. Credit Default Swaps (CDS) on Oracle bonds have widened to their highest level since 2009, signaling that the market is pricing in a greater risk of default.

A Financing Setback

Adding to the pressure, Oracle faced a notable setback in mid-December when Blue Owl Capital withdrew from a planned $10 billion partnership to fund a major data center project in Michigan. The investment firm cited Oracle's increased debt-to-equity ratio as the reason.

The collapsed deal has been interpreted by the market as a potential financing gap. With external capital partners growing more cautious, questions are mounting about whether Oracle can maintain its aggressive expansion tempo without further straining its own finances.

Strategic Moves and Analyst Perspectives

Amid the financial concerns, Oracle has made strategic operational decisions. The company sold its stake in chip designer Ampere Computing, realizing a pre-tax gain of $2.7 billion. CEO Larry Ellison emphasized a new strategy of "chip neutrality," stating Oracle will work with all relevant CPU and GPU providers rather than developing its own semiconductors.

Furthermore, Oracle secured a 15% stake in a new U.S.-based TikTok joint venture, alongside investors Silver Lake and MGX. As part of the deal, Oracle will handle core tasks related to data privacy, algorithm security, and content moderation. This could provide its cloud division with another large, high-margin client, aligning with its focus on regulation-sensitive data processing.

Analysts remain divided on the stock's outlook, balancing the evident risks against long-term potential:

• Citizens reaffirmed its "Market Outperform" rating on December 17 with a $342 price target, highlighting the value of long-term "take-or-pay" contracts.
• Cantor Fitzgerald maintained an "Overweight" rating but lowered its price target from $400 to $320, reflecting the heightened risks.
• Morningstar values the stock at $277 per share, noting that while the current price appears discounted, this discount accounts for significant execution risk and does not automatically present a clear buying opportunity.

Valuation and the Path Forward

Following its peak in September, Oracle's share price has corrected significantly. Trading around €165, the stock sits nearly 41% below its 52-week high of €280.70, though it remains well above the 52-week low of €111.42. The shares are also trading at an approximate 11% discount to their 50- and 200-day moving averages, underscoring the recent sell-off.

Management has outlined an ambitious vision, raising its revenue forecast for fiscal 2027 by $4 billion to $89 billion. This implies a growth rate of 33%, roughly double the current pace. The $523 billion order backlog provides exceptional visibility. The critical challenge will be converting these contractual commitments into actual revenue and cash flow without further burdening the balance sheet. The coming quarters, including the Q3 guidance and potential announcements on new data center financing solutions, will be crucial in demonstrating the sustainability of Oracle's aggressive growth path through 2026.