By Martin Baccardax

Oracle looks to be making an enormous bet on capturing demand for cloud-based artificial intelligence, setting growth targets that have stunned Wall Street analysts but have investors, at least for the moment, ready to go along for the ride.

The group delivered better fiscal fourth-quarter earnings than expected Wednesday night. Overall revenue rose 11% from last year to just under $16 billion. Sales from its cloud infrastructure division, which essentially constructs data centers that it can then lease to business clients looking for AI computing power, were up 52%.

Building that capacity, however, comes at a cost. Oracle is spending vast amounts to meet the "exceptional demand" the company is seeing.

Capital spending for the fourth quarter was pegged at $9.1 billion, or nearly 60% of overall revenue. For the fiscal year, capex rose 41% to $21.2 billion, and will rise another 18% to $25 billion in fiscal 2026.

All that spending left Oracle with negative free cash flow for the 2025 fiscal year, meaning it has spent more cash on its costs and investments than it is taking in from its day-to-day business. That is a precarious position for any company looking to either return cash to shareholders through dividend increases or new share buybacks, or take on extra debt to finance acquisitions.

Oracle's focus, however, is on growth. It looks willing to sacrifice near-term cash flow for longer-term gains.

The group expects its overall backlog of work, known in the software industry as "remaining performance obligations," to rise by 100% to $275 billion this fiscal year. Growth in cloud infrastructure was pegged at 70% while cloud services is expected to rise 40%.

Those forecasts, it is worth noting, don't include any contribution from Stargate, the $500 billion U.S. government-backed AI venture that includes Oracle, OpenAI, and Japan's SoftBank.

"Oracle is well on its way to being not only the world's largest cloud application company, but also one of the world's largest cloud infrastructure companies," CEO Safra Catz told investors on a conference call late Wednesday.

Chairman Larry Ellison went one step further.

"Oracle will be the No. 1 cloud database company. Oracle will be the number one cloud applications company. And Oracle will be the number one builder and operator of cloud infrastructure data centers," he said.

Analysts seem to be on board with the company's bold predictions, and its willingness to commit the money needed.

"We lean heavily on the culture of efficiency at Oracle coupled with a history of superior technology, which leads to our expectation of a free cash flow waterfall in the coming years," said Guggenheim analyst John DiFucci,

"Oracle stock might meander at times, but the trend here is up in our view," added DiFucci. He rates the stock at Buy, with a target of $220 for the price.

Evercore ISI analyst Kirk Materne is also a believer in Oracle's AI bet, but says that the big boost in cloud infrastructure spending will likely weigh on profit margins.

"However, we believe the growth in RPO helps support the revenue reacceleration story and we believe Oracle can still deliver mid-high single-digit operating profit growth in fiscal 2026," said Materne. He has an Outperform rating and a $180 price target on the stock.

KeyBanc Capital Markets analyst Jackson Ader, however, is a bit more cautious, and suggests that Oracle might be spending to catch up, rather than to meet demand "that is hard for us to see ourselves."

"We completely understand any investor skepticism, but we maintain that you don't have to believe the company's initial statements in order for it to deliver upside to numbers in the interim," he said.

Ader lifted his Oracle price target by $25, taking it to $225 a share. He too has an Overweight rating on the stock.

Oracle shares were 8.8% higher in premarket trading to indicate an opening bell price of $191.95 each, the highest levels of the year.

Write to Martin Baccardax at martin.baccardax@barrons.com

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June 12, 2025 09:11 ET (13:11 GMT)

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