Oracle’s AI Earnings Story Is Improving, but the Cash Flow Test Remains

Oracle is experiencing a positive turn in its AI earnings story as it transitions into a leading GPU-as-a-Service (GPUaaS) and AI infrastructure provider, but its investment case still depends on robust free cash flow support. On September 4, Morgan Stanley analyst Sanjit Singh increased Oracle's price target to $210.00 (from $207.00) while retaining an Equal Weight rating.

This boost in price target may be due to Oracle's enhancing GPUaaS gross margin narrative, but execution risk and the lack of free cash flow support might dampen enthusiasm.

Oracle's fourth-quarter fiscal results showcase operational strength, with higher-than-anticipated earnings and revenue. The company's revenue grew by 21% year-over-year, ending on May 31, while net income increased to $4.22 billion, or $1.45 per share, from $3.43 billion, or $1.19 per share, a year earlier. Total cloud revenue surged by 47% to $9.9 billion, and Oracle Cloud Infrastructure revenue soared 93% to $5.8 billion.

Notably, $75 billion of Oracle's AI contracts include GPUs that are prepaid by customers or directly supplied by them.

Morgan Stanley's note specifically emphasized Oracle's improving GPUaaS gross margin trajectory. Although these growth figures are not disputed, Oracle's execution and free cash flow numbers remain a concern. With its AI opportunity being extremely capital intensive, Oracle's Capex has risen from $21 billion in fiscal 2025 to $55.7 billion in fiscal 2026.

Although Oracle generated $32 billion in operating cash flow, free cash flow turned negative at $23.7 billion. The numbers indicate that investment exceeded cash generated by operations.

A crucial aspect of Oracle's investment thesis is funding its growth, and the company raised $43 billion in debt and $5 billion in equity financing in fiscal 2026. For fiscal 2027, Oracle expects capital expenditures up to $95 billion, although it anticipates repaying up to $25 billion of that through customer payments. Despite Morgan Stanley's unwillingness to apply Oracle's historical valuation multiple, given the improving earnings expectations, the company remains heavily owned by hedge funds.

At the end of the second quarter, 119 hedge funds held Oracle stock, up from 115 in the previous quarter. One of Oracle's largest hedge fund investors, Fisher Asset Management, increased its position by 39%, holding roughly 13.3 million shares at the end of the second quarter. While Oracle's bullish case is evident due to its improving AI narrative, GPUaaS margins, and accelerating OCI growth, the question remains whether the economics will improve quickly enough to offset its massive capital requirements.

The article concludes by noting that while Oracle presents a promising investment opportunity, other AI stocks might offer greater upside potential with lower downside risk.