Don't use Oracle and its challenges as a barometer for the many great AI stocks we own

CNBC Finance

5 min read

The broader AI trade is back in the hot seat because of Oracle. It shouldn't be. Oracle shares were getting crushed on Thursday following a quarterly sales miss, a disappointing guide, and a spending outlook increase. The magnitude of the stock decline was compounded by what management did not address on Wednesday evening's conference call, concerning OpenAI's ability to make good on its massive commitments to buy AI computing power from Oracle. The combination of that omission, as well as the reported results and forecasts, has put pressure back on AI-related stocks. While the Investing Club does not own Oracle, its importance to the AI ecosystem demands our attention. Much of Oracle's future revenue depends on whether OpenAI can actually grow its business fast enough to execute the $300 billion five-year contract that it signed. Oracle did not talk about that on the call Wednesday night, and OpenAI CEO Sam Altman on Thursday morning on CNBC did little to quash those worries. Altman was asked directly about Oracle but deflected, saying OpenAI is growing its business quickly and future growth depends on more computing power, the kind it promised to buy from Oracle and others. "Without this compute ramp, we can't drive this revenue growth," Altman explained. "We see way more reasons to be optimistic than pessimistic." Altman alluded to future models in the works â and then hours after appearing on CNBC, OpenAI announced a new one . The other part of the Oracle equation is the need to continue to build out its AI infrastructure capabilities. To keep that going, the company raised its full-year, fiscal 2026, capital expenditures guidance to about $50 billion, up from $35 billion as of September. Capex for fiscal 2025 was $21.2 billion. "Oracle has to be able to borrow to build," Jim Cramer said during Thursday's Morning Meeting. "[But] they don't have the kind of capital to do $50 billion." He added, "Oracle bit off a little more than it can chew." That's especially true when revenue in the reported fiscal 2026 second quarter of $16.06 billion missed analyst estimates at a time of surging demand for the kind of AI infrastructure capacity that Oracle provides â not to mention Oracle's fiscal Q2 free cash flow burn of nearly $10 billion, almost double the burn that was expected. There is no question that Oracle is seeing tremendous demand, as the company added $69 billion to its remaining performance obligation (RPO) during the quarter. As a result, Oracle's RPO, which again is heavily dependent on OpenAI, skyrocketed over 430% year over year to $523 billion. RPO speaks to future revenue. Current Street estimates for revenue in fiscal 2027, 2028, and 2029 combined amount to less than that, at just under $388 billion. On the call, Oracle Principal Financial Officer Doug Kehring said RPO growth was "driven by contracts signed with Meta , Nvidia , and others, as we continue to diversify our customer backlog." Kehring, meanwhile, downplayed concerns about Oracle's debt. "There are a variety of sources available to us throughout our debt structure in public bond, bank, and private debt markets. In addition, there are other financing options through customers that may bring their own chips to be installed in our data centers and suppliers who may lease their chips rather than sell them." He continued, "Both of these options enable Oracle to synchronize our payments with our receipts and borrow substantially less than most people are modeling. As a foundational principle, we expect and are committed to maintaining our investment-grade debt rating." Bottom line The Oracle situation is concerning and warrants additional monitoring, as the company is not in the same position as the tech megacaps, many of which are in our portfolio, which generate enormous levels of positive free cash flow and can, therefore, fund their investments without massive borrowing. However, what we heard on the Oracle call doesn't give us cause to change our view on the AI trade more broadly. While Oracle may need to get creative with its financing, we think that is an Oracle challenge, not an indication of a change in the AI outlook. It's clear to us that the demand for AI computing power is real, and the likes of Meta Platforms, Microsoft , and Amazon can meet their financial obligations. Take Thursday's news that Disney is going to invest $1 billion in OpenAI. The entertainment giant will also license 200 characters across its Disney, Marvel, Pixar, and Star Wars franchises to allow users of OpenAI's short-form video generator, Sora, to create content. This kind of arrangement only adds to our view that demand for AI products and, therefore, additional computing power, is going to increase materially in the years to come. That will provide a strong payoff for those companies able to fund the infrastructure buildout without ruining their balance sheets in the process. So, while the AI trade on Thursday may be under pressure for sentiment reasons, sustained weakness in any of our names will ultimately prove to be a buying opportunity. (Jim Cramer's Charitable Trust is long AMZN, MSFT, META, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Don't use Oracle and its challenges as a barometer for the many great AI stocks we own

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