Oracle bets $70B on AI data centers as $638B backlog grows

Oracle's debt-funded push into AI data centers is squeezing free cash flow even as its cloud backlog balloons to $638 billion, up 363 percent, betting that record demand outruns a $70 billion capital-spending cycle. Cloud infrastructure revenue jumped 93 percent to $5.8 billion in the fiscal fourth quarter, while the Oracle Multicloud AI Database grew 404 percent, its fastest-growing business ever.

"We'll spend a lot of capex and encounter free cash flow headwinds until these data centers come online," CFO Hilary Maxson told analysts, outlining roughly $70 billion in net capital outlays for fiscal 2027 financed by about $40 billion in debt and equity.

The buildout has already strained the balance sheet. Fiscal 2026 capital spending reached $55.66 billion against operating cash flow of $31.98 billion, producing negative free cash flow of $23.69 billion. Non-current debt climbed to $124.7 billion, and S&P Global Ratings cut Oracle's long-term credit rating to BBB-, one notch above junk, with Moody's maintaining a negative outlook. Gross margins slipped to 65.8 percent from 70.5 percent as data center construction costs mounted.

The bet is that prepaid and customer-supplied hardware — now $75 billion of the backlog — reduces how much capital Oracle must raise itself, and that confirmed fiscal 2027 guidance of $90 billion in revenue with non-GAAP earnings per share of $8.05 justifies the risk. Oracle shares trade at 23 times trailing earnings, a premium to the sector, after falling 8.9 percent over six months while the Zacks Computer and Technology sector gained 21.7 percent.

Backlog Concentration Puts OpenAI at the Center

S&P and market analysts estimate roughly half of Oracle's $638 billion order backlog is tied to a single client, OpenAI, leaving future cloud revenue heavily exposed to one counterparty's buildout schedule. Oracle has widened its footprint beyond that anchor, rolling out OCI Enterprise AI for dedicated cloud in July and, in August, announcing a multi-year deal with Quantinuum to bring hybrid quantum computing to its infrastructure. OCI also became one of the first cloud providers to offer Nvidia's Nemotron 3.5 Lightning model on day zero and connected Google Cloud's Gemini Enterprise directly to the Oracle AI Database.

Rivals Fund Their Own Buildouts

The competitive frame matters. Microsoft generated $67.99 billion of free cash flow in fiscal 2026 despite $115.95 billion in capital spending, while Alphabet's search advertising cushioned a second-quarter dip to negative $5.86 billion. Amazon, like Oracle, posted a free cash flow deficit — negative $27 billion in the first half — as AWS grew 36.7 percent to $42.2 billion. Oracle's outsized backlog growth relative to those three gives buyers a fundamentals-based reason to add on weakness, though it carries the thinnest margin for error among the hyperscalers.

Oracle's financing plan — roughly $40 billion in debt and equity for fiscal 2027, including a $20 billion equity issuance, with no additional debt expected in 2026 — gives the buildout a defined runway. The maintained 50-cent quarterly dividend and raised earnings guidance argue management sees the payoff arriving on schedule. For investors willing to absorb balance-sheet pressure, one clean quarter of positive free cash flow would be the signal that the AI data center bet is converting backlog into revenue.

This article is for informational purposes only and does not constitute investment advice.