Will Rising Capex Weigh on Oracle's Free Cash Flow Outlook?

Oracle's ORCL aggressive AI infrastructure buildout has put its free cash flow (FCF) outlook under scrutiny. In first-quarter fiscal 2027, capital expenditures jumped to $28.5 billion from $8.5 billion a year ago, pushing FCF to negative $5.4 billion despite record operating cash flow of $23 billion, up 184% year over year. Net of customer prepayments, cash capex was about $18 billion.

Guidance indicates the pressure will persist. Oracle reiterated fiscal 2027 capex of $90-$95 billion, with net cash capex capped at $70 billion, and has not set a timeline for FCF to turn positive after a negative $23.7 billion in fiscal 2026. The company plans to raise about $40 billion in debt and equity this year, including a $20 billion at-the-market stock sale completed in the first quarter, which dilutes shareholders. Gross margin is also expected to decline in fiscal 2027 as new sites ramp.

Still, the demand backdrop supports the spending. Remaining performance obligations rose $209 billion year over year to $664 billion, aided by more than $30 billion in new AI cloud contracts that Oracle said require no incremental capital raising and largely affect capex only from fiscal 2028. The company delivered 850 megawatts of capacity and more than 300,000 GPUs, while cloud infrastructure revenues surged 121% to $7.4 billion. Management expects projects to generate strong FCF soon after ramping, with conversion potentially near 100% of post-tax EBITDA.

For second-quarter fiscal 2027, Oracle expects total revenue growth of 30-34% and cloud revenue growth of 65-71% in USD, with non-GAAP EPS of $1.85-$1.93. Full-year revenues are now projected at a minimum of $90 billion, with non-GAAP EPS raised to $8.10 from $8.05. While the revenue trajectory is encouraging, FCF is likely to remain negative in the near term, making capex discipline and the upcoming Oct. 28 Investor Day key to watch.

How ORCL’s Capex Strategy Compares With Microsoft & Amazon

Oracle’s cash-flow strain mirrors a broader AI spending wave among U.S. hyperscalers. Microsoft MSFT spent $41 billion on capex, including finance leases, in fourth-quarter fiscal 2026, up 69% year over year, yet Microsoft still generated $19.6 billion in FCF, though down 23%. Microsoft expects FCF to stay positive in fiscal 2027. AmazonAMZN raised its 2026 capex outlook to $220 billion from $200 billion after second-quarter capex climbed to $54.2 billion from $32.1 billion. Consequently, Amazon’s trailing 12-month FCF swung to an outflow of $7.6 billion from an inflow of $18.2 billion, leaving Amazon’s cash profile closer to Oracle’s current position.

ORCL’s Price Performance, Valuation & Estimates

ORCL shares have plunged 26.5% year to date, underperforming the Zacks Computer and Technology sector’s growth of 22.6% and the Zacks Computer - Software industry’s decline of 2.1%.

ORCL’s YTD Price Performance

Image Source: Zacks Investment Research

ORCL’s valuation remains relatively attractive, with the stock trading at a trailing 12-month P/E ratio of 21.06X, lower than the sector average of 1.02X. Oracle has a Value Score of C.

ORCL’s Valuation Chart

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for ORCL’s fiscal 2027 earnings is currently pegged at $8.13 per share. The estimate implies 6.55% year-over-year earnings growth.

ORCL currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Radical New Technology Could Hand Investors Huge Gains

Quantum Computing is the next technological revolution, and it could be even more advanced than AI.

While some believed the technology was years away, it is already present and moving fast. Large hyperscalers, such as Microsoft, Google, Amazon, Oracle, and even Meta and Tesla, are scrambling to integrate quantum computing into their infrastructure.

Senior Stock Strategist Kevin Cook reveals 7 carefully selected stocks poised to dominate the quantum computing landscape in his report, Beyond AI: The Quantum Leap in Computing Power.

Kevin was among the early experts who recognized NVIDIA's enormous potential back in 2016. Now, he has keyed in on what could be "the next big thing" in quantum computing supremacy. Today, you have a rare chance to position your portfolio at the forefront of this opportunity.

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research