Oracle's Debt-Funded AI Expansion Amplifies Backlog Conversion Risks Amid Premium Valuation

What happened

Oracle's stock has declined 33%, sparking bullish optimism from some analysts, but this overlooks the company's struggle to monetize its $455.3 billion revenue backlog effectively. The tech giant plans to take on more debt to accelerate AI infrastructure build-out, aiming to capture cloud and AI demand growth. However, SEC filings confirm Oracle expects higher cloud and software expenses in FY2026, threatening near-term margins and free cash flow. With a premium valuation and intense competition from larger cloud players, execution risks like power constraints for data centers could hinder backlog conversion. Investors face a critical juncture where aggressive spending must yield tangible revenue growth to justify the current strategy.

Implication

The additional debt for AI expansion could worsen Oracle's leverage, with net debt/EBITDA already at 3.9x, potentially increasing interest burdens and squeezing cash flows. Higher operational expenses in FY2026 may delay margin improvements, exacerbating volatility in free cash flow that has shown recent swings. Failure to efficiently convert the $455.3 billion RPO could erode investor confidence, leading to further stock underperformance amid premium valuations. Success in this strategy might bolster Oracle's position in AI cloud services, but it requires flawless execution against power constraints and competitive pressures. Overall, investors should monitor capex discipline and RPO conversion closely, as missteps could invalidate the growth narrative and sustain the HOLD rating.

Thesis delta

The new article's bullish call does not shift the DeepValue HOLD thesis, as the reported debt plans and backlog concerns reinforce existing risks of margin compression and execution hurdles. This news underscores the need for proven RPO conversion and cost management before any upgrade, maintaining the cautious outlook. No material change in investment rationale is warranted given the alignment with previously identified headwinds.