Oracle (ORCL.US) will have an opportunity this week to prove to investors that its stock rally, which added approximately $370 billion in market value this year, stands on solid ground. The software giant kicked off its four-day "AI World" conference in Las Vegas on Monday, with the event focusing heavily on Oracle's cloud computing business—the rapid expansion of which has driven a 76% year-to-date stock surge, making it one of the top performers in the S&P 500 for 2025.

The conference comes amid market concerns that Oracle may be sacrificing profitability to lease computing power to AI companies like OpenAI. Last week, media reports suggested Oracle's cloud business margins were below most Wall Street expectations, causing shares to plunge 7.1% intraday on Tuesday. While the stock quickly recovered its losses, questions about the business's profitability persist. Oracle has previously projected that the business will see revenue surge 700% over the next three fiscal years.

"There are definitely investors concerned about the margin issue, or who think the targets are too aggressive," said Mark Matyjack, senior partner and financial advisor at Prudential Advisory. "This is a great opportunity for Oracle to address those concerns, especially since many skeptics believe the valuation is stretched, particularly if their massive OpenAI partnership doesn't translate into sustainable revenue." Prudential's parent company manages approximately $1.5 trillion in assets.

Wall Street is anticipating that Oracle's AI World event will include a keynote presentation by new co-CEO Mike Sicilia on Tuesday, with founder and Chief Technology Officer Larry Ellison also taking the stage. Ellison's Oracle holdings briefly made him the world's richest person last month. Thursday's investor day is expected to unveil updated financial targets, with Wall Street holding high expectations.

Mizuho Securities analyst Siti Panigrahi noted in a report that the conference will serve as an "important catalyst, with the company expected to clarify many controversies," particularly regarding margin concerns. Bernstein analyst Mark Moerdler expects "more details will help resolve some doubts."

Surging cloud computing demand has driven Oracle's overall sales growth, but the massive costs of associated investments have eroded profits. Data shows Oracle's revenue growth is expected to jump from 8% last fiscal year to 17% this fiscal year, but gross margins after operating expenses are projected to decline by more than 2 percentage points to 68.4%. In fiscal 2021, gross margins exceeded 80%.

The rapid growth has firmly established Oracle in the AI winners' camp. The company struck a reportedly five-year, $300 billion cloud computing deal with OpenAI in September, and its stellar September 10 earnings report triggered a single-day stock surge of 36%.

However, the stock's meteoric rise has also sparked bubble concerns—its valuation has reached the highest level since the dot-com bubble more than two decades ago. Based on forward 12-month expected earnings, Oracle's price-to-earnings ratio has approached 41 times, more than double its 10-year average and significantly higher than the P/E ratios of the seven major tech giants except Tesla.

Beyond margins, investors are also concerned about the spending required to expand Oracle's cloud computing capabilities. For fiscal 2026 ending in May, Oracle's capital expenditures are projected to reach $35.4 billion, a 67% increase from the previous year. Consequently, free cash flow is expected to show a negative $9.8 billion this year, following last year's first deficit since 1990.

Of course, AI bulls still have reasons for optimism: Microsoft's cloud business struggles to meet robust demand, Dell Technologies raised its four-year revenue and profit growth guidance due to AI expectations, and Taiwan Semiconductor posted strong September sales performance.

However, Gene Munster, managing partner at Deepwater Asset Management, points out that the interconnected nature of AI giants means weakness or excessive sentiment from any one company could drag down the entire sector.

"If one falters, all suffer, and the entire trading thesis could collapse," Munster said. "Oracle just joined the AI narrative circle, but ahead of earnings season, this conference will reveal whether we're still at the beginning of the AI trading cycle or approaching its end."