In artificial intelligence, it has become commonplace to spend a lot of money in the hopes of making even more, and Oracle intends to go even further.
Wall Street reeled last week when the software giant announced a sharp increase in contracted future revenue for AI computing services. Even though Oracle is already one of the biggest software companies in the world in terms of yearly revenue, those deals could double its size over the next three years. Given that ByteDance, the company that owns TikTok, is already a significant client, a possible agreement to maintain the app in the US could benefit Oracle even more.
Oracle’s stock swings amid investment in AI makeover
However, Oracle’s stock has fluctuated greatly. Following the announcement of the revenue deals in its fiscal first-quarter report, the company’s market value increased by over one-third to over $900 billion. As investors considered the challenges associated with such a significant increase in future obligations, the stock then lost some of those gains. Nevertheless, according to FactSet, Oracle’s stock is currently trading at more than 40 times forward earnings, the highest level since 2001.
That demands prudence. However, there is still cause for optimism among investors. The 48-year-old business has increased sales and profits while surviving technological changes on multiple occasions.
Oracle will need to invest heavily in its network infrastructure in order to meet the new revenue deals. Over the last few quarters, the company has already invested all of its operating cash flow in capital projects to increase its AI computing capacity. And that seems to be only the beginning. According to Visible Alpha consensus estimates, Oracle is expected to spend close to $29 billion over the next three fiscal years, and free cash flow is not expected to turn positive until fiscal 2029.
The move represents a significant shift for a business that, according to S&P Global Market Intelligence, was historically among the most cash-rich in the software industry, with an average of almost $12 billion in free cash flow annually from 2014 to 2024.
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