Oracle’s 30% Spike: Cloud Megadeals, AI Capacity, and a $455B Backlog — Does the Outlook Justify the Rerating?

The quarter’s reported numbers were not the headline: adjusted EPS came in at $1.47 versus $1.48 expected, and revenue was $14.93 billion versus $15.04 billion consensus. Revenue still grew 12% year over year, with net income roughly flat at $2.93 billion. The market instead zeroed in on what comes next.

OCI is the center of gravity. Cloud infrastructure revenue rose 55% year over year to $3.3 billion, and management outlined a multiyear ramp from about $10 billion in FY2025 to $18 billion in FY2026 (roughly 77% growth), then $32 billion, $73 billion, $114 billion, and $144 billion over the subsequent four fiscal years. The sheer scale of the demand signal was reinforced by RPO jumping to $455 billion (up 359% year over year), a contracted backlog that will recognize over time as capacity comes online and workloads scale.

To meet that demand, Oracle plans approximately $35 billion in capex this fiscal year, about 65% higher, prioritizing technology, networks, and GPUs over owning data center real estate. That approach is intended to accelerate time-to-capacity while limiting balance-sheet exposure to buildings and land—though it still relies on navigating chip supply, grid interconnections, and permitting timelines.

Analysts described the outlook as staggering: four multibillion-dollar contracts with three customers signed in the quarter, OpenAI’s agreement to develop 4.5 gigawatts of U.S. data center capacity with Oracle, and a multiyear OCI revenue glidepath that implies an order-of-magnitude step-up. Oracle also provided near-term anchors, guiding fiscal Q2 adjusted EPS to $1.61–$1.65 with 14%–16% revenue growth, effectively setting execution checkpoints for the coming quarter.

The reaction: price target increases proliferated, though sell-side averages still lag the speed of the move. Recent aggregated targets averaged in the high-$200s, below the stock’s post-guidance surge, underscoring how quickly investor expectations have reset.

A central question is demand composition. Some of the activity may reflect hyperscalers offloading capacity during a supply/power-constrained buildout, steering workloads to Oracle when their own GPU or site readiness is tight. That demand is real, but its durability, pricing, and stickiness may differ from organically won workloads.

For context, Google Cloud disclosed a $106 billion backlog growing faster than revenue, with more than half expected to convert within two years—illustrating how AI-era commitments phase in over time as capacity and use cases mature. For Oracle, the key will be conversion velocity and breadth: translating megadeals into high-utilization workloads with improving unit economics while broadening adoption beyond a handful of marquee AI customers. Monitoring customer concentration, offload persistence, and OCI growth cadence will be essential.

Supply-chain signals corroborate sustained AI infrastructure demand. Broadcom announced a new $10 billion custom AI chip customer, widely linked by analysts to OpenAI, with shipments expected to begin in 2026. The commitment sits alongside rising orders from existing web-scale customers and supports a multiyear buildout arc spanning silicon, optical interconnects, power, and cooling.

Oracle’s positioning hinges on access to advanced GPUs and strategic partnerships—from enabling Google’s Gemini on OCI to an Oracle AI Database service that aims to run models like OpenAI’s directly on enterprise data resident in Oracle databases. These integrations are designed to reduce friction between data gravity and AI execution, potentially accelerating backlog conversion.

Power is the emerging bottleneck. U.S. electricity generation remained seasonally elevated in 2025—roughly 401 TWh in January and 393 TWh in June—reflecting grid loads that can affect data center deployments. Even with an asset-light real estate approach, power sourcing and interconnection queues are critical-path items for capacity timing.

Capex efficiency and utilization will determine returns. Oracle ended FY2025 with operating cash flow of about $20.8 billion and free cash flow modestly negative as investment accelerated—typical when capacity is added ahead of revenue recognition. Margins often lag during ramp and improve as utilization rises and software/service attach increases.

Liquidity and leverage require attention. Recent filings show a current ratio below 1 and elevated leverage alongside strong ROE, consistent with an aggressive buildout posture. Execution risks span chip availability, supply chain timing, grid interconnections, and permitting. Competitive intensity remains high as Oracle scales against incumbents with entrenched enterprise footprints. Customer concentration adds sensitivity to spending arcs from a few AI leaders.

Pricing risk is two-sided: scarcity can support pricing near term, but if supply catches up unevenly, localized price pressure can appear. The asset strategy—own the tech stack and networks, not the buildings—may speed capacity and focus capital on higher-return layers, but it doesn’t eliminate external dependencies.

With long rates elevated and policy rates projected to ease gradually, valuation hinges on conversion credibility and cash flow trajectories. The 10-year Treasury is near 4.1% and the 30-year around 4.7%, keeping discount rates above the pre-2022 regime. FOMC projections point to a lower policy rate path over the next two years, which could modestly ease the cost-of-capital headwind if realized.

Base case: steady OCI conversion, balanced capex pacing, and rising utilization support continued top-line acceleration and gradual gross margin expansion. Bull case: faster RPO monetization, sustained megadeal momentum, favorable mix/pricing, and efficient capital deployment compress the catch-up period to hyperscale leaders. Bear case: capacity delays, slower conversion, offload fading, and pricing pressure weigh on margins amid elevated power and build costs.

Key watch items: quarterly OCI growth cadence and mix; gross margin progression as new capacity fills; capex efficiency and timing versus plan; customer concentration and retention; and RPO conversion pace and quality. Macro variables—rates, power availability, and regulatory timelines—remain direct inputs to execution and valuation.