Questions about Oracle's "explosive orders": Relying entirely on OpenAI, with revenue all in the long term, can it be profitable, and can it afford to build it?

Oracle's latest financial report has plunged the market into a contradictory frenzy.

On one hand, the company's current revenue and short-term guidance both fell short of expectations; on the other hand, its remaining performance obligations (RPO, or backlog) skyrocketed overnight to a "staggering" $455 billion. This significant increase was almost entirely driven by four multi-billion dollar contracts, with analysts both domestically and internationally generally believing that the largest share is directly related to a long-term cloud services contract with OpenAI.

Meanwhile, the latest news reveals the mystery behind this massive RPO: On September 10, it was reported that OpenAI had signed a contract to purchase $300 billion worth of computing power from Oracle over the next approximately five years, meaning OpenAI will need to pay Oracle about $60 billion on average each year.

For investors, understanding the true implications behind this set of data is crucial. JP Morgan stated in its research report on the 10th that the market may have overlooked several core issues: Is the customer base for this epic order too concentrated (especially the reliance on OpenAI)? Is the vast majority of revenue far off? What are the profit margins for these AI orders? And does Oracle have sufficient funds to support astronomical infrastructure construction for these orders? These questions are directly related to Oracle's future profitability and cash flow health, and are key considerations that investors must think about calmly amid the frenzy.

Explosive RPO Growth: All Bets on AI and OpenAI

The most striking aspect of Oracle's first fiscal quarter is undoubtedly the astonishing growth of its RPO. The $455 billion figure represents an increase of approximately $317 billion in future business for the quarter, with a year-on-year growth rate of 359%. Company CEO Safra Catz told analysts that the company signed contracts with three different customers during the quarter. She emphasized:

We have signed significant cloud contracts with giants in the AI field, including OpenAI, xAI, Meta, NVIDIA, AMD, and many others.

Recent reports have disclosed the performance obligations that have driven the market wild: On September 10, OpenAI signed a contract to purchase $300 billion worth of computing power from Oracle over the next approximately five years. The agreement will take effect in 2027, with the required 4.5GW power capacity equivalent to the output of two Hoover Dams, enough to supply electricity to about 4 million households.

It is important to note that OpenAI is still a loss-making startup, with an annualized revenue of approximately $10 billion disclosed in June, which is far below the $60 billion it will need to pay on average each year for this agreement. Therefore, the success of this deal is entirely based on the assumption that ChatGPT can sustain its explosive growth and be widely adopted by billions of users globally, as well as major enterprises and governments.

JP Morgan analysts noted that most of the new RPO belongs to long-term performance obligations, with only about 10% classified as short-term RPO (i.e., revenue to be recognized within the next year), indicating that the short-term performance contract amount has seen almost no growth quarter-on-quarter, and most revenue will only be recognized in the distant future. Morgan Stanley's equity research team also predicted in their report on the 10th that of the RPO amounting to $455 billion, only about 10% would be recognized as revenue in the next 12 months.

While OpenAI's growth is extraordinary, it is also facing increasing pressures, including an expensive talent war, tense negotiations over its partnership with Microsoft, and a for-profit restructuring currently under review by two state regulatory agencies. For OpenAI, this is a radical gamble on its future growth; for Oracle, it means concentrating a significant portion of future revenue on a single client, which poses severe challenges to the execution capabilities and market prospects of both parties.

Short-term financial pressure, guidance below expectations

In stark contrast to the impressive backlog of orders, Oracle's weak spot performance and short-term outlook are concerning. Total revenue for the first fiscal quarter grew by 11% at constant currency, below the market's general expectation of 13%. Among them, cloud services and license support revenue grew by 14% (at constant currency), also below the consensus expectation of 16%.

Even more worrying for the market is the company's guidance for total revenue growth in the second fiscal quarter, which is set at 12-14%, below the market expectation of 15%; total cloud revenue growth guidance is set at 32-36%, also below the expected 37%. Analysts in the report believe that this reflects that most of the newly added RPO belongs to long-term contracts, which have limited financial contributions in the near term.

Meanwhile, Oracle's free cash flow is also under pressure due to significant capital expenditures. The free cash flow for the first fiscal quarter was negative $362 million, far below the market expectation of $1.271 billion. To support the construction of cloud infrastructure (OCI), the company raised its capital expenditure guidance for fiscal year 2026 by $10 billion to $35 billion, indicating that its free cash flow will continue to face pressure for some time.

Trade-off between profit and growth

Oracle is engaged in a typical gamble of "trading profit for growth." JP Morgan believes that most of the new orders are related to AI model training, which has relatively low profit margins and may slow down the growth rate of operating profit in the long term, making it lag behind revenue growth.

Based on this judgment, the bank expects that after Oracle releases its financial report, the market's general expectations for its revenue over the next few years will be raised, but the expected changes in earnings per share (EPS) will be minimal, while the expectations for free cash flow (FCF) will be lowered.

Oracle has set its operating profit growth guidance for fiscal year 2026 at "mid-teens," slightly above the market's current growth expectation of about 12%. JP Morgan believes this may reflect more the cost-saving effects brought by recent layoffs rather than high profit growth from the business itself.

JP Morgan maintains neutral rating, raises target price

Despite numerous questions and short-term pressures, JP Morgan acknowledges that Oracle has achieved "impressive accomplishments" in acquiring OCI business and recognizes its long-term potential in the AI field. The bank raised Oracle's target price from $210 to $270, primarily due to an upgraded expectation of the multi-year growth trajectory for OCI business However, the bank maintains a "Neutral" rating on Oracle, believing that the current risks and rewards are "balanced." While positive data points related to AI may dominate market discussions in the short term, investors ultimately need to focus on fundamental issues such as profitability and cash flow. Oracle's success depends on its ability to efficiently build data center capacity, maintain the growth momentum of OCI orders, and successfully integrate the previously acquired Cerner business.

As of the time of publication, Oracle's stock in the U.S. pre-market is maintaining its upward trend, rising 1.13% to $328.33.