Oracle is currently experiencing a remarkable upturn, largely propelled by an extraordinary expansion in its AI-focused cloud computing contracts. This surge has surprised many, with analysts noting the company's fiscal first-quarter report highlights a substantial increase in its remaining performance obligations (RPO), a crucial indicator of future revenue. This burgeoning RPO signals Oracle's strong position in the AI infrastructure market, a sector with immense growth potential. Despite a slight miss on recent earnings estimates, the market's response underscores confidence in Oracle's strategic shift towards cloud and AI, making it a compelling story in the tech landscape.
Oracle's AI Cloud Backlog Propels Stock to Historic Highs
In a significant development for the tech world, Oracle announced on a recent Tuesday its fiscal first-quarter results, revealing a monumental 359% increase in its remaining performance obligations (RPO) to an staggering $455 billion. This figure, representing contracted revenue yet to be recognized, far exceeded analyst expectations and indicates a robust demand for Oracle's cloud computing services, particularly those related to artificial intelligence. CEO Safra Catz further projected this RPO to reach $500 billion in the coming months, attributing this growth to the escalating demand for Oracle Cloud Infrastructure (OCI).
Oracle, a venerable 48-year-old tech firm, has historically lagged behind competitors like Amazon, Microsoft, and Alphabet in cloud adoption. However, it is now strategically capitalizing on the massive computational requirements of AI development. A notable partnership includes the development of 4.5 gigawatts of data center capacity for OpenAI, the creator of ChatGPT, as part of the broader 'Stargate AI data center initiative'. This move, along with securing major cloud contracts with other leading AI companies such as xAI, Meta, Nvidia, and AMD, has firmly established Oracle as a preferred provider for AI workloads.
Following these announcements, Oracle's stock witnessed an unprecedented rise, climbing over 41% to $341.42 in late morning trading on Wednesday, significantly surpassing its previous record high of $260.87. This marks Oracle's most substantial single-day share price gain since December 1992, placing it among the top S&P 500 performers for 2025 with over 104% year-to-date growth. Analysts, including Deutsche Bank's Brad Zelnick, expressed astonishment at the scale of Oracle's AI-driven backlog. William Blair's Sebastien Naji noted that the 'staggering' RPO provides a clear trajectory for Oracle's multi-year AI expansion, reiterating an 'outperform' rating. BofA Securities' Brad Sills upgraded Oracle to 'buy', emphasizing the company's ability to capture significant market share in the rapidly expanding AI infrastructure sector, which is projected to reach $155 billion by 2030. Barclays analyst Raimo Lenschow described the quarter as 'transformational', increasing his price target for Oracle's stock and affirming its status as an AI winner, despite a minor earnings miss.
However, challenges remain for Oracle, particularly in scaling its data centers to meet the escalating demand. The company reported a negative free cash flow of $362 million for the quarter, largely due to increased capital expenditures, which rose to $8.5 billion from $2.3 billion a year prior. Catz indicated that capital expenditure is expected to reach $35 billion for fiscal year 2026, an increase from the previous estimate of $25 billion. While this substantial investment in OCI build-out is seen by Evercore ISI analyst Kirk Materne as a necessary trade-off for securing a leadership position in next-generation AI infrastructure, D.A. Davidson's Gil Luria maintains a 'neutral' stance. Luria voiced concerns regarding the profitability of AI workloads, suggesting they might operate at single-digit margins, potentially hindering Oracle's historical 50% operating margin and impacting earnings growth, even with revenue reaching the mid-teens.
Oracle is set to host an analyst day at its annual Cloud World convention in October, an event that could provide further insights and act as another catalyst for the stock.
The current landscape suggests that Oracle's strategic pivot towards AI and cloud computing is yielding substantial results, positioning the company at the forefront of a booming industry. While the financial commitments for scaling infrastructure are significant, the potential for long-term growth and market leadership in AI appears to outweigh these immediate concerns. This move could redefine Oracle's market identity and solidify its relevance in the rapidly evolving technological domain.