By Dan Gallagher

Spending a lot of money to hopefully make a lot more money has quickly become the norm in artificial intelligence. Oracle will be taking that to a whole other level.

The software giant rocked Wall Street last week after reporting a huge jump in contracted future revenue to provide AI computing services. Over the next three years, those deals could double the size of what is already one of the world's largest software companies by annual revenue.

The prospect of a deal to keep TikTok running in the U.S. is another potential boost for Oracle, given that the app's owner, ByteDance, is already a major customer.

But the stock has been on a roller coaster. Oracle's market value soared by more than one-third to over $900 billion after the company announced the revenue deals as part of its fiscal first-quarter report.

It then gave back a chunk of those gains after investors considered the potential complications coming from such a massive increase in future obligations. Even so, Oracle's stock is now trading at more than 40 times forward earnings -- the highest since 2001, according to FactSet data.

So caution is warranted. But investors are right to be optimistic. The 48-year-old company has a track record of surviving technology transitions and delivering sales and earnings growth.

Granted, the future revenue deals will require Oracle to make substantial investments in its network infrastructure.

The bill is already running high. Oracle has been spending all of its operating cash flow on capital expenditures to build out its AI computing capacity over the past few quarters.

That now seems like just the beginning. Analysts expect the company to burn nearly $29 billion over the next three fiscal years. Free cash flow isn't forecast to turn back into positive territory until fiscal 2029, according to consensus estimates from Visible Alpha.

That's quite a turn for a company that has historically been one of the most flush names in software. Oracle averaged nearly $12 billion in annual free cash flow from 2014-2024, according to data from S&P Global Market Intelligence.

Another point of concern is that the bulk of Oracle's new business is coming from one customer. The day after Oracle's earnings announcement, The Wall Street Journal reported that OpenAI signed a five-year deal with the software maker valued at $300 billion. That accounts for most of the $317 billion increase in remaining performance obligations that Oracle reported for the quarter.

As the owner of ChatGPT, OpenAI might not seem a risky bet. But the nine-year-old startup still loses billions every year because of the enormous cost of computing, and talent, required to build and power its large language models. It's also committing to high-priced deals with other cloud providers such as CoreWeave and engaging in a pricey effort to develop its own internal chips with Broadcom.

OpenAI has reportedly told its private investors that it's on pace to hit $11 billion in revenue this year. That sounds big, but consider the competition. Google -- OpenAI's chief rival in building frontier AI models -- will hit nearly $400 billion in revenue this year. It is expected to spend nearly $80 billion in capital expenditures on efforts that include its own internal chip program.

OpenAI's ability to fund its ambitions will depend greatly on its ability to raise more capital. Oracle, likewise, will need to draw from the money well. This could involve either debt or stock sales.

Oracle is one of the world's largest software companies, but its annual operating cash flow is less than one-quarter what Microsoft, Google, Amazon.com and Meta Platforms generate. The company is also highly leveraged.

Dave Novosel of Gimme Credit estimates that Oracle will need to add as much as $13 billion in debt over the next few quarters. But he forecasts the company's extraordinary growth should offset this, leading to lower leverage in future years.

Oracle's expensive AI gamble has a good chance of paying off.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

September 17, 2025 05:30 ET (09:30 GMT)

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