Oracle faces a high bar for earnings as investors look for an AI payoff

By Christine Ji

Oracle's stock has been pressured over concerns about whether its AI spending will yield the necessary returns

While AI infrastructure spending is squeezing short-term margins, some on Wall Street see a favorable risk/reward ratio for Oracle's stock.

Oracle is pivoting toward cloud infrastructure, and that has proved controversial on Wall Street due to the heavy spending it requires. Can the company sway the doubters with its third-quarter results Tuesday?

Shares of Oracle (ORCL) are down 22% so far this year, and they're off 55% from their September peak. Investor sentiment has remained subdued even as the company announced a $50 billion funding strategy that some analysts thought would remove an overhang around the amount of debt the company will need to take on this year.

Unanswered questions remain regarding Oracle's ability to execute on AI infrastructure buildouts. Investors are also curious about the ultimate return on investment that will come from all these AI commitments, BNP Paribas global head of software research Stefan Slowinski wrote in a note Friday.

While Slowinski doesn't expect Oracle's earnings results to offer definitive conclusions, "we believe simply hitting [fiscal third-quarter] consensus numbers would be a good first step in rebuilding confidence that the company can consistently deliver against expectations," he wrote. Slowinski maintained his buy rating but lowered his price target to $201 from $290.

Analysts tracked by FactSet are expecting Oracle to report $16.2 billion in sales and $1.70 in earnings per share. Remaining performance obligations, or future revenue not yet recognized, are expected to be $556 billion.

Read: Oracle's selloff offers a chance to buy an 'upper-echelon' growth stock for cheap, analyst says

Last Friday, Bloomberg reported that negotiations for a 600-megawatt expansion at Oracle's Abilene, Texas, data-center site were canceled due to financing challenges and OpenAI's shifting needs. However, TD Cowen analyst Derrick Wood wrote in a Monday note that the development could reduce Oracle's capital-expenditure needs by up to $20 billion in the next few years but not impact Oracle's RPO, as he believed the deal hadn't been formally signed.

Oracle has disputed these reports, saying in a statement Sunday that "recent media activity about the Abilene site are false and incorrect."

Amid AI funding concerns, Oracle is reported to be planning thousands of job cuts as well. Meanwhile, the company is expected have put $14 billion toward capital expenditures in the third quarter, leading to negative free cash flow of $8.1 billion.

Read: Oracle is the canary in the coal mine for Big Tech's debt-fueled AI spending spree

For Tuesday's earnings report, Jefferies analyst Brent Thill is focusing on a few key bogeys, or performance benchmarks. These include 86% growth for the company's Oracle Cloud Infrastructure division, 42% operating margins and $18 billion in net new RPO. However, Thill expects Oracle's margins to continue declining in the short term as the company's business becomes more focused on AI infrastructure. He anticipates adjusted operating margins to trough at roughly 33% in fiscal year 2028.

"Overall, we see favorable risk-reward, with our analysis suggesting the market is assigning negative value to the [OpenAI] deal and the stock already discounting a bear-case outcome," Thill wrote in a note last week.

-Christine Ji

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03-09-26 2258ET