Nearly $70 billion evaporated in a single day! Oracle 'fearless' of risks, continues to increase investment

The narrative logic of AI is being validated globally, but the valuation bubble is teetering on the edge of being punctured.

Once performance or guidance falls short of expectations, the decline in stock prices may also exceed market expectations, and the impact on companies will take a long time to repair. Especially for some traditional internet giants undergoing transformation, the "damage" they may suffer between investment and returns could be even more significant.

After the U.S. market closed on December 10, Eastern Time, Oracle released a disappointing earnings report.

The report showed that in the second quarter of fiscal year 2026, Oracle achieved revenue of $16.06 billion, a year-on-year increase of 14%, lower than analysts' expectations of $16.21 billion; GAAP net profit was $6.1 billion; non-GAAP net profit was $6.7 billion, a year-on-year increase of 57%; GAAP earnings per share were $2.1, a year-on-year increase of 91%.

Looking specifically at the core cloud business segment, the report showed that cloud revenue for the quarter was $8 billion, a year-on-year increase of 34%, but fell short of market expectations of $8.04 billion; cloud infrastructure revenue was $4.1 billion, a sharp increase of 68% year-on-year; cloud application revenue was $3.9 billion, a year-on-year increase of 11%.

Notably, Oracle's free cash flow for the quarter was -$10 billion, far worse than market expectations, while capital expenditures surged 41% quarter-on-quarter to $12 billion.

Oracle executives disclosed in the earnings call that capital expenditures for fiscal year 2026 are expected to be raised to $50 billion, an increase of $15 billion from previous expectations.

According to data from the Intercontinental Exchange, Oracle's five-year credit default swaps have climbed to their highest level since 2009.

Faced with the disappointing earnings report, the market voted with its feet. On December 11, Oracle opened sharply lower, with intraday losses exceeding 16%, and closed down more than 10%, losing nearly $70 billion in market value in a single day. Notably, Oracle's decline did not end there; on December 12, Oracle continued its downward trend, falling 4.47% in a single day.

As a result, Oracle's helmsman Larry Ellison saw his net worth shrink by $24.9 billion in a single day, and his ranking on the Bloomberg Billionaires Index dropped from second to third.

The AI Bubble

As the "weakest link" among U.S. AI giants, Oracle has erased all gains since September 10.

In response to market concerns, Oracle provided relatively positive earnings guidance.

Oracle expects third-quarter revenue to grow 19%-21%, with cloud growth of 40%-44%, while maintaining its fiscal year 2026 sales forecast at $67 billion.

The market did not fully endorse Oracle's guidance, as the sharp decline in stock prices already reflects market sentiment.

According to statistics, not just Oracle, almost all leading internet giants have increased their capital expenditures for the year.

Google expects its 2025 capital expenditures to be $91 billion-$93 billion, higher than the previous quarter's estimate of about $85 billion. Looking ahead to 2026, Google's capital expenditures will increase significantly.

Microsoft's earnings report showed that third-quarter capital expenditures rose to $34.9 billion, primarily directed toward infrastructure supporting OpenAI models and its own Azure AI. Microsoft CFO Amy Hood said during the earnings call that customer demand for Azure exceeds the supply of AI infrastructure, and capacity constraints are expected to last at least until the end of the fiscal year.

Meta raised its 2025 capital expenditure guidance range from $66 billion-$72 billion to $70 billion-$72 billion. Meta also warned that 2026 capital expenditure growth will be "significantly greater" than 2025, with total expenditure growth rates also "accelerating significantly," driven primarily by infrastructure costs, including cloud spending and depreciation.

Amazon expects full-year 2025 capital expenditures to reach $125 billion, higher than the market consensus of $117.5 billion, and will continue to increase next year.

Faced with the massive capital expenditures of leading internet giants, Wall Street is already divided, but for the AI race, the giants clearly cannot—and must not—hit the brakes.

During the earnings call, Oracle executives repeatedly emphasized that the vast majority of the company's capital expenditures are invested in revenue-generating equipment to data centers, not land, buildings, or power. Oracle management also stated that this approach allows the company to quickly convert cash spent into revenue earned when delivering cloud services to contracted and committed customers.

It should be noted that compared to other internet giants, Oracle's AI expansion is more aggressive. Data shows that Oracle recently issued approximately $18 billion in new investment-grade bonds, bringing its total outstanding debt to over $100 billion, making it the largest debt holder among all large tech companies with investment-grade ratings. In other words, the massive debt issue is the real reason for market concerns about Oracle.

Morgan Stanley predicts that Oracle's "adjusted debt" could more than double by 2028, reaching approximately $300 billion.

Market Divergence

As AI investments enter deeper waters, the "sunk costs" of leading internet companies are becoming increasingly high.

Therefore, the likelihood of leading internet giants hitting the brakes on investment is very low, as none can afford the cost of failure. For example, against the backdrop of continued uncertainty in AI spending prospects, Oracle's debt-driven data center expansion and customer concentration risks are already on the table, yet Oracle remains steadfast in choosing debt-fueled expansion.

Oracle stated in its announcement that the company has secured new cloud commitments from Meta Platforms, NVIDIA, and other companies, with "remaining performance obligations"—a measure of order size—jumping to $523 billion in the quarter, exceeding market expectations.

After the earnings release, Barclays Fixed Income Research published a report stating that Oracle's capital expenditures to fulfill its massive AI contracts have far exceeded its free cash flow support capacity, forcing it to rely heavily on external financing.

The bank predicts that Oracle will face a severe funding gap starting in fiscal year 2027, with the company potentially running out of cash by November 2026.

Barclays believes that the entire hyperscaler industry is funding the AI race by issuing massive bonds, which is already putting pressure on credit markets. Oracle's predicament is particularly acute, with a debt-to-equity ratio of 500%, compared to 50% for Amazon, 30% for Microsoft, and even lower for Meta and Google.

Morgan Stanley's analyst team noted that Wall Street's focus on Oracle has shifted from "order growth" to "actual order conversion efficiency" and "overall company margins."

The team pointed out that although cloud order volumes continue to expand, investors are losing confidence in their ability to convert into "sustainable profitability and margin expansion." Earnings data showed that Oracle's total revenue grew 13% year-on-year last quarter, unexpectedly falling short of market expectations; cloud infrastructure revenue was $4.079 billion, up 66% year-on-year, below the market consensus of 68%; software revenue unexpectedly fell 3% year-on-year, becoming a significant drag on overall growth.

Morgan Stanley also warned that Oracle's global sales team restructuring could trigger execution risks, while flexible contract models such as "customer-supplied chips" may reduce Oracle's AI capital expenditure pressure but could weaken the overall profit margins of its GPU-centric AI computing infrastructure sales, further exacerbating uncertainty around conversion profitability and margins.

Wedbush Securities analyst Dan Ives said investors should not focus too much on the slightly lower-than-expected revenue but should instead pay attention to the size of the company's remaining performance obligations. Oracle's RPO reached $523 billion this quarter, significantly higher than Wall Street's previous estimate of $500 billion.

Dan Ives said that in the long run, these AI-related backlogs will translate into staggering revenue growth in the coming years: fiscal year 2026 could see growth of more than 17%, fiscal year 2027 about 35%, and fiscal year 2028 could reach about 45%.

Kan Jian Finance believes that, judging from market feedback, institutions have already become wary of the massive capital expenditures of leading internet companies, and any slight movement can trigger an overreaction in the market. Moreover, as investments continue to grow, the pressure to deliver on future performance increases. Currently, AI has become a battlefield that U.S. tech giants cannot afford to lose, so ignoring realization risks and continuing to increase investment has become their only path forward.

In the long run, the emergence of an AI bubble is not scary. With the large-scale adoption of AI applications, we believe the AI bubble will eventually be digested by the performance of the giants. Therefore, it is necessary to ignore some of the bubbles brought by investments and wait for the AI industry to enter the performance realization stage, where all problems will find their answers.$Oracle(ORCL.US)