Oracle’s (ORCL) Growing but Can It Pay for the Buildout?

Yahoo Finance reported earlier this month, citing the Wall Street Journal, that Oracle (NYSE:ORCL) is in talks with Apollo and Goldman Sachs about paying for AI chips. Outside investors would fund a separate company that buys the chips and leases them to Oracle, so Oracle would not borrow directly.

It is a lot of financial engineering for a company whose sales just grew 30% to $19.3 billion in its fiscal first quarter. But Oracle spent $28.5 billion on equipment in those three months, up from $8.5 billion a year earlier, and free cash flow came in at negative $5 billion. The question is whether Oracle can fund the demand it has already signed up for.

Oracle rents computing power to AI developers, sells business software over the internet, and licenses database software. Demand looks solid, but funding is the open question, and the stock’s price already assumes a fair amount of trouble.

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Customers Want More Than Oracle Can Build

Oracle’s cloud infrastructure business, which rents data-center computing power, grew 121% to $7.4 billion in the quarter. The company says demand for AI cloud services is growing faster than the supply it can deliver. Its backlog of signed contracts reached $664 billion, up $209 billion from a year earlier. If you’re interested in cloud computing stocks, we recently compiled a report on 10 Best Cloud Computing Stocks to Buy According to Billionaires.

Over the past five years, Oracle’s sales grew only about 10.7% a year. Earnings per share grew about 5.1% a year over five years but about 23.8% over three, so the speed-up began before this quarter.

Its older businesses are growing more slowly, with software licensing down 3% in the quarter. Still, Oracle kept an operating margin of about 34% over the past 12 months, so the company is making money while it builds.

Growth Is Eating Into Cash

Oracle produced a record $23 billion in operating cash flow in the quarter, yet free cash flow was still negative after capital spending. To help cover the gap, the company has sold $20 billion of common stock through an at-the-market program, according to its earnings release. It also says the new contracts don’t change its plans to raise capital.

A customer that stumbles is the risk, and Yahoo Finance’s report on the financing talks says OpenAI, one of Oracle’s largest cloud customers, is reportedly bringing in less annualized revenue than investors had estimated. A backlog turns into cash only if customers keep paying, and outside investors are being asked to fund the chips in between.

Both points are real, but they are funding risks more than demand risks. The contracts are signed, and Oracle now expects full-year revenue of at least $90 billion. A weaker customer or costlier financing limits how confident anyone can be about the cash, not about the sales. For a shareholder, that means owning a fast-growing business that is paying for its growth with share sales and outside financing. If you’re looking for stocks investors are avoiding, check out 10 Stocks Investors Are Running Away From.

Oracle Trades at a Discount to Its Sector

Oracle’s forward price-to-earnings ratio is 15.75, based on adjusted earnings expected for fiscal 2027. That sits below the sector median of 21.01 and below Oracle’s own five-year average of 22.12.

A discount can look like an easy answer, but the earnings outlook for this fiscal year is modest. Analysts expect earnings per share to grow 6.69%, a slow rate next to Oracle’s recent sales growth. Adjusted earnings also run above the reported figure, at $1.92 per share last quarter against $1.56 on a GAAP basis.

So the headline’s question comes down to cost, not demand. Customers clearly want what Oracle is building, and the stock’s discount suggests investors doubt the company can raise the money cheaply enough. The number to watch in its next quarterly report is free cash flow. If it stays negative while spending keeps climbing, the financing talks will matter more than the sales growth.

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This article is originally published at Insider Monkey.