'There's a Reason,' Says Investor About Oracle Stock

For Oracle (NYSE:ORCL) investors, the past year has been a miserable one,with shares down more than 50% from last October's highs. The decline reflects concerns about Oracle's transformation from a traditional software provider into a major AI infrastructure and data-center player, bringing with it a much larger capital burden and significantly more financial risk.

The biggest concern is that Oracle is now spending enormous amounts of money upfront in anticipation of future AI-related revenue. That spending has pushed the company toward external financing, while a substantial portion of the expected revenue is tied to OpenAI.

Investor Prakhar Agarwal argues that while the backlog is substantial, it is not the same as realized revenue, particularly when so much of it depends on a single customer.

At the same time, Oracle's current financial position deserves particular scrutiny. The company spent roughly $28.5 billion on capital expenditures in its latest quarter, exceeding its $23.1 billion in operating cash flow. Net debt has climbed above $169 billion, while debt and debt-like obligations are substantially higher when leases and purchase commitments are included. Oracle also has around $288 billion of additional lease commitments and approximately $34 billion in unconditional purchase commitments.

That financing burden becomes more important if AI spending slows. Unlike some of its larger hyperscaler peers, Oracle has less balance-sheet flexibility to absorb a prolonged period of heavy investment without relying on debt or equity markets. It has already completed a $20 billion at-the-market equity offering and raised another roughly $5 billion through mandatory convertible preferred shares, highlighting its need for outside capital.

Agarwal also questions how much of the enormous AI infrastructure spending should actually be considered growth. Higher chip, memory and other component prices mean hyperscalers are paying considerably more for the same underlying equipment. Oracle therefore faces not only the risk of spending heavily on new capacity, but also the risk that the cost of building that capacity remains elevated.

The debt market is already reflecting some of these concerns. Oracle's credit-default-swap spreads have risen sharply, while a long-dated bond has recently yielded above 8%. Its BBB rating from S&P also leaves relatively little room before investment-grade status becomes a more significant concern.

So, although the valuation has fallen substantially, Agarwal argues that this does not automatically make the stock cheap. With leverage high, capital requirements substantial, customer concentration significant and future AI returns still uncertain, investors should take a cautious stance. "The margin of safety remains low, while execution risk still remains material," the investor summed up.

For those reasons, Agarwal maintains a Hold (i.e., Neutral) rating on Oracle. (To watch Agarwal's track record, click here)

Some Street analysts agree with that stance, but the majority have a more upbeat take. With a mix of 27 Buys, 4 Holds and 1 Sell, the stock claims a Strong Buy consensus rating. The forecast calls for 12-month returns of 79%, given the average price target stands at $245.75. (See ORCL stock forecast)