Oracle's Real Growth Story Is Hiding in Its $664 Billion Backlog

Oracle's recent stock struggles have investors on edge. The company has taken on a significant amount of debt in an effort to become an AI-focused cloud provider. On top of that, much of Oracle's business depends on its deal with OpenAI, which has not performed as well as hoped financially. However, despite these concerns, there may be a silver lining for Oracle's growth prospects.

The company's $664 billion backlog may still help drive its growth story forward, even if OpenAI does not meet expectations. This is because Oracle has accumulated over $125 billion in debt to finance the infrastructure needed to support its AI cloud services. With a book value of around $67 billion, this debt places a significant strain on Oracle's balance sheet, raising concerns about whether it can handle the pressure.

Additionally, yields on some of Oracle's corporate bonds have risen above 8%, further adding to investor concern. While this is not as high as the 15% bond yields seen in the neocloud sector, it has still raised alarms. Moreover, nearly half of Oracle's debt is tied up in the $300 billion deal with OpenAI. Given this, some investors are questioning whether Oracle can honor its commitment to OpenAI.

However, Oracle does have a substantial backlog that exists independently of OpenAI. In fact, this backlog grew by $209 billion over the past 12 months, with the increase being nearly two-thirds the size of the OpenAI deal. This suggests that even without the help of OpenAI, Oracle's AI investments are likely to be monetized. Investors can also take solace in the fact that Oracle reported over $19 billion in revenue for the first quarter of fiscal 2027, which represents a 30% increase compared to the previous year.

Moreover, nearly all of this growth came from Oracle's cloud segment. Despite rising interest expenses, Oracle still managed to generate almost $4.8 billion in net income for fiscal Q1, marking a 63% increase compared to the previous year. While Oracle's AI investments may face challenges in an AI downturn, the company's non-cloud segments provide a stabilizing force.

These segments, although now slow-growing, remain profitable and could help cushion the blow of an economic downturn. The company's stock price has also been affected by the recent sell-off, causing its price-to-earnings (P/E) ratio to fall to just 20. Although this lower valuation may be justified by the company's high debt load, Oracle has historically maintained an average P/E ratio of 35 over the last five years, indicating a discount that risk-tolerant investors might find appealing.

Overall, Oracle stock may warrant consideration for risk-tolerant investors, given its impressive $664 billion backlog. While the backlog does not guarantee future revenue, it does provide a strong foundation for Oracle's growth story. Additionally, the company's growing cloud business and other stable segments add to its appeal.

Finally, Oracle's current low P/E ratio further strengthens the case for buying the stock and reaping the potential benefits associated with its substantial backlog.