Oracle Shares Have Plunged. Should Investors Buy the Dip Heading Into 2026?
Oracle's stock has declined after mixed fiscal Q2 results, despite significant growth opportunities in AI and cloud infrastructure. The company reported a 438% increase in RPOs, including a $300 billion contract with OpenAI. However, concerns about capital expenditure and debt persist. Oracle's fiscal-year revenue guidance remains at $67 billion, with projected growth in cloud revenue. The stock's valuation is debated, with potential upside linked to OpenAI's success, but risks remain due to high debt and spending.
Oracle (ORCL 4.63%) stock skyrocketed after the company delivered its fiscal 2026 first-quarter report in early September, but since then, it's given up all of those gains and then some. The latest blow to the stock came when the company reported mixed results for its fiscal second quarter after the bell on Wednesday.
However, Oracle still has one of the biggest growth opportunities in AI. So based on the latest results and management's outlook, should investors buy the stock on this dip as we approach the new year?
From cloud excitement to cloud angst
Investors jumped on board Oracle stock in September after the company saw a huge surge in remaining performance obligations (RPOs), a metric that measures the remaining value of its already-signed contracts with customers. These are generally non-cancelable contracts for artificial intelligence (AI) data centers it needs to build, but investors have become more nervous recently about how much the company will have to spend and how much debt it will need to take on to build out that infrastructure.
NYSE: ORCL
Key Data Points
In its fiscal second quarter, which ended Nov. 30, its total RPOs soared 438% year over year to $523 billion. That was also a 15% jump sequentially from $455 billion in fiscal Q1. Within that RPO number is a $300 billion five-year contract with OpenAI. This should provide Oracle tremendous revenue growth over the next several years.
In its fiscal first quarter, the company forecast $35 billion in capital expenditures, which was up from an earlier forecast of $25 billion. It just tacked another $15 billion onto that number, bringing it to $50 billion.
While that is still a lot less spending than the big three cloud computing providers -- Amazon, Alphabet, and Microsoft -- Oracle doesn't generate nearly the same amount of cash as these tech powerhouses: It only produced $10.2 billion in operating cash flow through the first six months of this year. Meanwhile, with all its capex, its free cash flow came to an outflow of $20.5 billion over the same period.
Also, its balance sheet isn't in nearly as good shape as the big three hyperscalers. It ended its last quarter with $19.8 billion in cash and securities, but $108.1 billion in debt. Given its negative free cash flow, its debt will only balloon from here.
Principal Financial Officer Doug Kehring defended the company's capex, and said it would need to raise significantly less money than the more than $100 billion that some analysts have projected it will need to complete these buildouts.
Turning to its fiscal Q2 results, revenue rose by 14% to $16.06 billion, which missed the $16.21 billion analyst consensus, as compiled by LSEG. Cloud revenue surged 34% to $8 billion. Within the cloud segment, cloud infrastructure revenue jumped by 68% to $4.1 billion while cloud application revenue increased by 11% to $3.9 billion.
Adjusted earnings per share (EPS) soared 54% to $2.26. That easily topped the $1.64 analyst consensus.
Management maintained its fiscal-year revenue guidance of $67 billion. For its fiscal third quarter, it forecast revenue would rise by 19% to 20% and for cloud revenue to jump by 40% to 44%. It projected its adjusted EPS will rise by 16% to 18% to a range of $1.70 to $1.74.
Image source: Getty Images.
Is it time to buy the stock on the dip?
Oracle should experience some explosive growth in the coming years from its cloud infrastructure business. It has contracts for huge data center projects in place, and now it just needs to execute on them. A lot is arguably riding on OpenAI and its $300 billion commitment, but at this point, a lot of big AI players are tied to OpenAI and whether it succeeds.
From a valuation perspective, Oracle now trades at a forward price-to-earnings ratio of under 26, based on analysts' estimates for its fiscal 2026. Given its debt and current growth projections for this year, that's not cheap, per se. However, if it gets a good return on these huge data center projects, then the valuation does look enticing.
At this point, Oracle is almost like a leveraged way to invest in the success of OpenAI, given how closely they are tied to this huge data center buildout. So I think the stock could have a lot of upside from here and rebound in 2026, but there is certainly a high element of risk that should not be overlooked.
