Oracle's AI-Driven Growth is Clouded by Escalating Debt and Valuation Concerns Ahead of Key Earnings Report.

Oracle Corporation (ORCL) is scheduled to release its fiscal second-quarter earnings following the close of the market on Wednesday, a report closely scrutinized by Wall Street for indications regarding the sustainability of the artificial intelligence (AI) sector's valuation. Consensus analyst estimates compiled by Bloomberg project an earnings per share of $1.64 for the quarter, an increase from $1.47 in the corresponding period last year, on anticipated revenue of $16.21 billion, representing a 15% year-over-year growth. A key area of focus, Oracle Cloud Infrastructure (OCI), the company's high-growth AI division, is forecasted to see a 68% jump in revenue to approximately $4.1 billion.

Despite the strong growth outlook for its cloud segment, Oracle's stock has declined 33% from its September high of $328, contrasting with the collective gain of over 11% reported by the "Magnificent Seven" major technology stocks. The stock initially peaked after the company reported a substantial, AI-driven surge in remaining performance obligations (RPO)—a metric for future contracted revenue—which reached $455 billion in the first quarter, catalyzed by a $300 billion agreement with OpenAI (OPAI.PVT). However, the subsequent stock decline reflects investor unease over Oracle's substantial reliance on OpenAI to meet ambitious revenue targets, especially considering the ChatGPT developer's high costs relative to its projected revenue.

Oracle is also central to wider anxieties concerning an AI bubble, fueled by increasing use of debt to finance data center projects and the prevalence of complex, multibillion-dollar circular financing agreements among companies participating in the AI expansion. Oracle's total debt stood at approximately $105 billion as of the last quarter, with the company issuing nearly $25.8 billion in corporate bonds this year to fund its escalating AI investments. This growing reliance on debt to finance capital expenditures in the AI race has unsettled investors, raising concerns that the current technology rally is overly dependent on speculative future returns, potentially inflating company valuations beyond what their underlying fundamentals warrant.

Oracle's debt is perceived as having a higher risk profile compared to its major peers, holding a BBB bond rating, whereas Meta (META) and Amazon (AMZN) possess AA- ratings, and Alphabet (GOOGL) holds an AA rating, according to composite data from major credit agencies. This perception of risk was underscored earlier this month when the cost to insure Oracle's debt against default, measured by credit default swap pricing, reached its highest level since 2009. The assumption of greater debt coincides with a sharp increase in the company's expenditures, as capital expenditures dramatically rose from $2.3 billion in the prior year to $8.5 billion in the first quarter. Analyst commentary indicates intensified concern regarding Oracle's capacity to finance its aggressive capital expenditure strategy driven by AI. Nevertheless, some analysts, such as JPMorgan's Mark Murphy, view the rising costs as a trade-off for potential long-term revenue growth, suggesting that positive investor sentiment may persist as long as OCI's growth rate exceeds that of the principal hyperscale competitors.