Oracle Corporation ORCL

Key data

The business

Oracle sells three things: the database software that stores corporate records, the applications that run finance and human resources departments, and rented cloud compute. The first two are a mature annuity with decades of switching costs behind them, sold to large enterprises on multi-year licenses and subscriptions. Gross margin is 65.8% and operating margin is 30.8%, which is what a software toll booth looks like.

What changed is the third business. Oracle committed to building enormous AI compute capacity and renting it to a short list of very large customers under multi-year contracts, and it is funding that with debt. Revenue grew 17.4% to $67.4B in the year ended 31 May 2026, capital spending hit $55.7B, and free cash flow was negative $23.7B. The annuity now finances a construction project.

Business read. A 30.8% margin software annuity is underwriting a capital program it cannot yet fund.

Things you might not know

Oracle issued $5.0B of preferred stock in fiscal 2026, an instrument it had not used before, alongside $40.1B of net debt issued. Preferred ranks ahead of common stock on claims, so the cushion behind $156.2B of total debt is thinner than the debt line alone suggests.

Interest coverage is 4.5x, down from the double digits a software balance sheet normally carries, and tangible book value per share is negative $7.79 against a $146.47 share price. Fixed charges and the capital budget now draw on the same $32.0B of operating cash flow, which covered 57% of capital spending last year.

Property and equipment carries at $129.6B against $9.3B of annual depreciation and amortization, a ratio of roughly 14 to 1 by my computation, on assets whose replacement cycle is set by the next chip generation. Useful-life assumptions, not demand, decide how much of that spending reaches reported earnings each year.

Fundamentals

Growth is real and it accelerated: 6.0%, 8.4%, then 17.4% across three years, with the operating margin held at 30.8%. The problem sits one statement lower. Operating cash flow grew 53.8% and capital spending grew 162.7%, so free cash flow went from negative $0.4B to negative $23.7B in a single year.

Valuation

Peers: Microsoft, SAP, IBM, Salesforce, Alphabet.

The source report carries no peer medians, and vendor comparables were not retrievable in this session, so those cells stay empty rather than invented. On Oracle's own basis the two halves of the page disagree: 18.2x FY2027 consensus earnings and 25.1x trailing GAAP earnings against 8.1x enterprise value to revenue, with a 65.8% gross margin intact and no free cash flow multiple to quote, because free cash flow is negative $23.7B.

Management

Compensation

The linchpins

Win big if

Capital spending peaks and the contracted backlog converts. Consensus needs $89.6B of FY2027 revenue against $67.4B delivered, which is $22.2B of new revenue in one year, and it needs that without another step up in the $55.7B capital budget. First observable proof is the 8 September print: revenue clearing the $19.1B consensus with the FY2027 capital spending outlook held or trimmed. Confirming signal is FY2027 capital spending guided flat or lower than $55.7B while revenue still grows above 30%, which puts free cash flow break-even inside FY2028 and pays the $5.79B dividend out of the business again.

Surprised down if

Capital spending rises again and the revenue behind it does not. Oracle borrowed $40.1B in a year it paid $5.79B of dividends out of negative $23.7B of free cash flow, so every extension of the buildout lengthens the period when the equity depends on faith rather than cash. First observable proof is a September capital spending raise toward $70B without a matching backlog disclosure. Confirming signal is revenue growth decelerating below 25% year over year, which would mean the concrete is running ahead of the demand, with $124.9B of net debt and negative $7.79 of tangible book underneath it.

Last word

Eighteen times forward earnings, and negative $23.7B of free cash flow: the multiple and the cash flow are describing different companies.