The rally in artificial intelligence-related stocks is suddenly on shaky footing, and Oracle Corp.’s earnings report after the close represents the group’s next test.
The software and cloud-computing company’s results come a week after a disappointing forecast from chipmaker Broadcom Inc. brought a halt to the blistering rally in chipmakers and other AI stocks. The Philadelphia Stock Exchange Semiconductor Index has fallen 12% since then, and the tech-heavy Nasdaq 100 Index is down more than 6%.
Oracle, known for its database software, has seen its revenue growth jump from a push into cloud services amid soaring demand for AI computing. The transition has been costly, however, and rising capital expenditures have turned its free cash flow negative, heightening concerns about Oracle’s ability to continue funding its infrastructure buildout.
“The key question for Oracle is whether it can meet its ongoing obligations and convert potential revenue into actual revenue, and whether its balance sheet gives it the time and space to do so,” said Cyrus Amini, chief investment officer at Hyphen Wealth Management, which holds the stock in client accounts. “If it can’t answer that in a satisfactory manner, it’s not difficult to imagine the market really punishing the stock.”
Oracle shares had been on an upswing prior to last week, recovering from a fourth-quarter swoon triggered by concerns about its outsized exposure to OpenAI, which has lost ground to Anthropic and Alphabet Inc.’s Google in the market for AI services. The stock climbed 27% from the start of the year through its 2026 peak, but has slumped over the ensuing sessions along with other AI-levered companies, including Dell Technologies Inc. and Super Micro Computer Inc.
Oracle shares are down 1.2% on Wednesday and on track to extend a losing streak to four days, a period over which the stock has fallen 14%.
This earnings report needs to show that Oracle has enough capacity to meet AI demand — a question facing all cloud-computing providers, according to Bloomberg Intelligence’s Anurag Rana.
“Fundamentals are very strong,” he said. “The big question is whether they have the appropriate data center buildup for fulfilling that demand.”
So investors will be paying close attention to revenue growth in Oracle’s cloud segment, known as OCI. Sales in that unit are expected to expand 92% in Oracle’s fiscal fourth quarter, which ended in May, compared with 52% a year ago , according to the average of analyst estimates compiled by Bloomberg.
Of course, investors will also be closely scrutinizing the company’s profitability. Oracle is expected to deliver adjusted earnings per share of $1.97 in the quarter, up 16% from a year ago, and a gross margin of nearly 67%, down from about 72%.
Read More: AI Selloff a ‘Wake-Up Call’ for Investors, Wells Fargo Says ·
OCI had “a solid quarter last time around and could see another quarter of acceleration there,” said John Belton, a portfolio manager at Gabelli Funds, which holds Oracle shares. “The high level question is: You’ve got accelerating revenue growth, but what about revenue quality? Is this just mixing from a super-high margin, sticky, database software business to a low-margin, commoditized infrastructure provider with customer concentration risk?”
Free cash flow is expected to be negative $3.5 billion in the fourth quarter. While that’s a slight deterioration from negative $2.9 billion a year earlier, it’s a big improvement the previous two quarters, in which negative free cash flow totaled more than $20 billion.
The balance sheet weakness is putting pressure on Oracle to deliver on cloud revenue growth, according to Hyphen’s Amini.
Oracle “might get a free pass if it had positive cash flow, but if the balance sheet has no room to give, it will be harder for the stock to bounce back the way the other hyperscalers would,” he said. “It could be a tough trend to work your way out of.”
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Earnings Due
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Earnings Postmarket:
- Oracle Corp. (ORCL US)
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