Oracle is trying really hard to convince investors it won’t have a debt problemOracle is trying really hard to convince investors it won’t have a debt problem

Oracle is bending over backward to convince investors that it won’t be strained by the heavy capital outlays it needs to fund its AI transition, and that its giant backlog of remaining performance obligations (RPO) represent money in the bank.

• In its earnings report Wednesday, the company noted a record level of RPO: $638 billion. It also said it plans to raise $40 billion in debt and equity this fiscal year, half of which has already been raised in equity.
• That means more debt issuance — potentially as much as $20 billion of it — is coming, and Wall Street’s ears certainly perked up at that mention. 
• Wedbush Securities’ Dan Ives wrote, “Adding more debt to the capital structure is not a move the Street wants to see and continues to create this ‘tug of war’ on the name between RPO and the necessary capital raises/AI datacenter buildout in the near-term.”

Remember: investors’ concerns about Oracle’s debt are a big part of what drove the stock down from its peak in September after those mammoth future revenue contracts boosted the company’s shares. Investors have questioned**** whether Oracle can handle that backlog and quickly turn it into a high-margin business, whether the companies making those contracts — like OpenAI — are good for the money, and how much money Oracle will need to get there.

The Takeaway

Oracle tried some financial engineering to assuage investors. It said that $75 billion of RPO contracts were either prepaid or included “customer-supplied hardware” — referring to big customers bringing their own GPUs, which in this economy are better than money. The company also introduced “net cash outlay for capital expenditures,” a metric designed to soften the blow of its true capex spending.

Did the market buy it? The maneuvering doesn’t seem to be working all that well, with the stock falling more than 8% on Thursday. Shares are down some 45% from their peak last September.