Oracle's massive AI investment triggers debt crisis, the real concerns behind the sharp after-hours stock plunge

Oracle (ORCL)’s latest earnings report reveals the ambitions and dilemmas of the tech giant amid the AI frenzy. While cloud business performance is impressive, what investors truly care about is how this software giant will resolve the rapidly expanding capital expenditures and the worsening cash flow crisis.

Stock Price Plummets 11%, Investors Lose Confidence in AI Investment Returns

After the market close on December 10, Oracle’s stock price dropped from the regular trading close of $223.01 to $197.27 within a few hours, a decline of over 11.5%. This is not just a reaction to a disappointing earnings report but also reflects deep concerns on Wall Street about its aggressive expansion strategy.

Following the earnings release, market reactions were candid: a traditional software leader, in pursuit of the AI hot trend, is burning cash in unprecedented ways. The fiscal Q2 of FY2026 (ending November 30) confirms this — revenue of $16.06 billion, up 14% year-over-year, but falling short of the market expectation of $16.21 billion.

Capital Expenditures Surge, Free Cash Flow Turns Negative $13.2 Billion

The core issue triggering market panic is the out-of-control spending. Last quarter’s capital expenditures reached $12 billion, far exceeding analyst expectations, and management significantly raised the full-year capital expenditure forecast from $35 billion three months ago to about $50 billion — more than doubling the $21.2 billion of the previous fiscal year.

This reckless investment directly impacts Oracle’s cash generation ability. Last quarter’s free cash flow was approximately negative $13.2 billion, not only worse than the market’s expected negative $5.2 billion but also indicating that the company is overdrawing cash to support its AI infrastructure expansion.

To meet financing needs, Oracle recently issued about $18 billion in new debt, pushing its total debt over the trillion-dollar mark. Among large investment-grade tech companies, this debt level is among the highest, and risk pricing in the bond market has risen accordingly — the five-year credit default swap (CDS) cost continues to climb, with investors voting with their feet and expressing concerns about its debt repayment capacity.

Cloud Business Shows Strong Growth, But Conversion Speed Matters to Investors

From a business perspective, Oracle is not without highlights. Cloud revenue grew 34% annually to $7.98 billion, accounting for about half of total revenue. Core cloud infrastructure (OCI) revenue increased 68% year-over-year to $4.1 billion, indicating strong demand for its AI-related services.

More notably, the “remaining performance obligations” (RPO), which reflect future revenue, surged to $523 billion, more than quadrupling year-over-year and surpassing market expectations. These orders mainly stem from new contracts with tech giants like Meta and NVIDIA, with the company expecting to generate an additional $4 billion in revenue in FY2027.

However, Wall Street’s questions remain sharp: can these large order commitments be smoothly converted into actual revenue? Can the huge upfront investments be recouped within a reasonable timeframe? These questions have no clear answers, and investor patience is wearing thin.

Management Attempts to Calm the Market, But Confidence Restoration Takes Time

During the earnings call, Oracle’s executives pledged to maintain investment-grade credit ratings and hinted that the actual funding needs might be far lower than external estimates. They proposed diversified financing approaches — allowing customers to bring their own chips, and suppliers to lease rather than sell — which could help synchronize expenditures with cash inflows and reduce net borrowing needs.

Regarding risks of over-reliance on a few large customers, management emphasized that its AI cloud infrastructure is highly flexible and “interchangeable,” capable of quickly reallocating computing resources among different clients. This somewhat alleviates the risk of being “held hostage” by a single customer.

However, these commitments and explanations have limited market impact. The stock price plunged after hours, and since the high point in early September, Oracle has fallen more than 31%. The tepid response from the bond market further indicates that investors’ risk assessment of its aggressive strategy is rising.

Conclusion: The Balancing Act of AI Investment

Oracle has become a microcosm of the current AI capital expenditure frenzy. This earnings wave highlights the fundamental challenge faced by tech companies pursuing AI opportunities: how to balance growth, profitability, and financial health.

Investor patience is being tested. They are no longer satisfied with grand visions and staggering order commitments but are eager to see actual revenue realization, improvements in free cash flow, and gradual debt reduction. Oracle needs to deliver results, not just words, to rebuild market confidence.