Key Takeaways
- Microsoft is winding down a 2023 deal to rent AI capacity from Oracle, two days after Oracle reportedly scrapped a $7 billion chip lease with Tencent.
- Oracle raised about $20 billion in stock and notes, using its entire funding cap through fiscal 2030 within five days of setting it.
- Oracle says demand for older GPUs “remains strong,” but its $664 billion backlog nearly matches Microsoft’s on about a fifth of the revenue.
- The fiscal second-quarter report, expected in mid-December, must show cloud growth of 65% to 71% and a backlog that holds up.
Oracle (ORCL) just had a rough week, and almost none of the damage came from its own results.
On Wednesday, the Financial Times reported that Oracle scrapped a $7 billion, five-year chip lease with Tencent Holdings (0700) after US officials raised concerns. Two days later, Bloomberg reported that Microsoft (MSFT) is winding down a 2023 deal to rent AI computing capacity from Oracle.
Both stories landed right after Oracle sold $10 billion of stock at $116 a share, an 11% discount to its October 30 close.
Oracle pushed back on the Microsoft report. “Demand for OCI’s AI infrastructure remains strong, including for earlier-generation GPUs,” a spokesperson told Reuters.
That may well be true. Still, the bigger question is what these exits say about a $664 billion backlog.
A funding cap spent in five days
The order of events matters here:
- November 2: Oracle priced 86.2 million shares at $116 plus $10 billion of senior notes, raising about $20 billion.
- November 4: The Tencent lease, which covered about 100,000 advanced AI chips in Southeast Asian data centers, was reportedly canceled.
- November 6: Microsoft was reported to be switching off rented Oracle servers that run older Nvidia chips.
The raise is the piece I keep coming back to. On October 28, Oracle capped new capital-market funding for fiscal 2027 through 2030 at $20 billion, split evenly between equity and debt. Five days later, it raised the full amount.
The stock has been choppy ever since…
Front-loading the money clears the overhang of a future offering. However, it also leaves Oracle with no new capital-market budget through fiscal 2030.
The backlog carries more weight now
Oracle’s fiscal first quarter, which ended August 31, looked strong on paper. Revenue rose 30% to $19.3 billion, while cloud infrastructure revenue jumped 121% to $7.4 billion. Oracle also booked more than $30 billion of new AI cloud contracts, lifting remaining performance obligations to $664 billion.
That backlog is close to Microsoft’s in size. Microsoft reported $677 billion of commercial remaining performance obligations last quarter, on $92.3 billion of revenue and 48% Azure growth. Oracle carries a similar pile on about a fifth of the revenue.
So every lost contract gets scrutiny. Bloomberg could not determine the size of the Microsoft deal, and the capacity ran on aging chips. Oracle also said in September it was renewing contracts for four-year-old GPUs at a 20% premium. Even if Tencent’s $7 billion sat fully in the backlog, it would be about 1% of it.
So what does it cost to turn that backlog into revenue?
Oracle spent about $28.5 billion on capex in the quarter, roughly 1.5 times its revenue.
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Customers have to fund the gap
Free cash flow was negative $5 billion in the first quarter, even though operating cash flow rose 184% to $23 billion. Debt has piled up alongside it.
Notes payable and other borrowings reached $125.3 billion at the end of August, against fiscal 2026 revenue of $67.4 billion.
Oracle plans for capex to peak in fiscal 2027 and 2028, and it expects growth to be self-funded from fiscal 2029. With the outside budget spent, vendor financing, customer-supplied hardware and prepayments have to cover the rest. A canceled lease or an unrenewed contract takes some of that customer money off the table.
My take: The Microsoft exit looks narrow because it involves aging hardware, and the Tencent loss came from Washington’s pressure. Neither changes the demand picture much by itself. What bothers me is the lack of slack. Oracle spent its four-year funding allowance in under a week, so execution now has to be close to flawless. I’d wait for proof before buying this dip.
The next checkpoint is Oracle’s fiscal second-quarter report, expected in mid-December. Oracle guided for revenue growth of 30% to 34%, cloud growth of 65% to 71% and non-GAAP EPS of $1.85 to $1.93. Watch whether the backlog holds above $664 billion and whether the cash burn starts to narrow.
So what is Oracle stock actually worth?
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