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Oracle’s (ORCL) recent earnings revealed an impressive $638 billion pipeline of future contracts. The magnitude of this backlog — now bigger than Microsoft’s (MSFT) $627 billion backlog — suggests customers find the company more attractive than competitors like Microsoft, Alphabet's (GOOGL) Google Cloud, and Amazon's (AMZN) AWS. Despite this, ORCL stock is down 49% from its 52-week high of $345.72. If the company’s business is so attractive, why isn’t the stock responding accordingly?

The answer is straightforward, but at a time when the AI trade is going strong, investors may not be paying attention. Oracle’s free cash flow (FCF) turned negative during the just-concluded fiscal 2026. From 2022 to 2024, FCF grew at a healthy rate before plummeting in 2025. Then in fiscal 2026, free cash flow came in at -$23.7 billion, which is no small figure. Oracle is set to raise an additional $40 billion through debt and equity issuance. The resulting dilution won’t be pretty for existing shareholders.

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On top of that risk, there is a real danger that the company will never be able to fulfill its backlog. Nearly half of Oracle's remaining performance obligations (RPO) come from OpenAI, so the concentration risk is real. If AI spending were to take a hit due to any technological change or economic issues, the company’s ability to convert its backlog into revenue would be severely impacted. In fact, Oracle just missed out on a data-center deal with Microsoft. Developments like this may come back to haunt investors.

The backlog may be the highest among AI companies, but converting it into revenue remains a risk for Oracle.

Oracle is a global technology company that provides database software, enterprise applications, and cloud computing services. Its product portfolio includes Oracle Database, Oracle Cloud Infrastructure, and Oracle Fusion Applications. Founded in 1977, the company is headquartered in Austin, Texas, and led by co-CEOs Clay Magouyrk and Mike Sicilia. Co-founder Larry Ellison serves as Executive Chairman and Chief Technology Officer.

In the last 12 months, ORCL stock has fallen 14%, significantly underperforming the S&P 500 ($SPX), which has gained more than 25% during the same period. The stock hit its 52-week high in September 2025 but started falling after that, with the decline mainly due to concerns over high debt for AI infrastructure. While ORCL stock has increased by 18% over the last three months, it remains closer to its 52-week low than its high.

The valuation has come down considerably since Oracle's September 2025 peak. The forward price-to-earnings (P/E) ratio is 28.5 times, slightly below both Oracle's own five-year average and the sector median. That suggests reasonable value on an earnings basis. Meanwhile, the price-to-sales (P/S) ratio of 7.8 times is well above the sector median, indicating that investors are paying a premium for Oracle’s revenue compared to the broader tech sector.

The company’s EPS consensus goes from growth of 5% in fiscal 2027 to an average of nearly 37% in the following three years. This suggests that aggressive spending on AI infrastructure could generate healthy returns as Oracle's $638 billion in RPO converts into revenue. Capital structure remains a concern for the firm, with $156 billion in total debt and only $31 billion in cash. Oracle's valuation looks good if the AI demand pays off, but if it doesn’t, the debt could become a serious problem.

Oracle reported fourth-quarter fiscal 2026 earnings on June 10, with the firm beating analyst consensus estimates on both key metrics. Revenue came in at $19.18 billion compared to the expected $19.1 billion, reflecting year-over-year (YOY) growth of 21%. Non-GAAP EPS came in at $2.11, beating the estimate of $1.96 and marking 24% YOY growth. Total cloud revenue for the quarter reached a record $9.9 billion, up 47% YOY. Increasing demand for AI training and inference workloads helped the firm grow its Oracle Cloud Infrastructure revenue by 93% to $5.8 billion. RPO at the end of the period totaled $638 billion, a massive 363% YOY increase driven by companies signing long-term AI infrastructure deals with Oracle. Additionally, the Oracle Multicloud AI Database unit grew 404% YOY, becoming the firm’s “fastest growing business ever.”

For the next quarter, management expects revenue growth of 27% to 29% and non-GAAP EPS of $1.72 to $1.76. For fiscal 2027, Oracle expects to report revenue of $90 billion. CFO Hilary Maxson stated that, due to customer demand and Oracle’s growing visibility, the firm expects a revenue compound annual growth rate (CAGR) of 31% and an EPS CAGR of 28% through fiscal 2030. When asked about expected returns for investors during a period of heavy investment, Maxson said that return on invested capital (ROIC) is expected to be “in the high 20s” and that the bring-your-own hardware structure could make that even higher.

Piper Sandler analyst Billy Fitzsimmons recently increased his ORCL stock price target from $210 to $225 while maintaining an “Overweight” rating. Piper Sandler cited strong RPO growth and believes that Oracle will be able to protect its margins against rising component costs. The analyst also expressed confidence in Oracle's ability to benefit from AI cloud consumption. Meanwhile, Mizuho analyst Siti Panigrahi maintained an “Outperform” rating with a much higher price target of $320.

Based on 43 Wall Street analysts, ORCL stock holds a consensus “Strong Buy” rating. The mean price target of $259.07 indicates potential upside of 48% from current levels. Analyst price targets range from a high of $400 to a low of $155 per share. That price gap suggests that, while some analysts see Oracle benefiting from the AI infrastructure demand surge, others believe its high debt and aggressive spending might not pay off even with growing AI demand.

On the date of publication, Jabran Kundi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com