Oracle has disclosed a massive $638 billion backlog. Anyway, here’s why stocks fell:

trust (ORCL 2.21%) After the markets closed on Wednesday, the company reported its fourth quarter fiscal 2026 results (ending May 31), and by most measures the report was very good. Revenues increased 21% year-over-year to $19.2 billion, and the company’s contracted future revenue balance increased to a record $638 billion. Management also stuck to its forecast for fiscal 2027 revenue to grow about 34% to $90 billion. However, as of this writing, shares of the cloud and database giant were down about 7% in after-hours trading.

So why do investors sell at these numbers?

Some of the market’s attention seems to be focused on the cost of all this growth. In addition to raising $48 billion in debt and equity in fiscal 2026, Oracle said it plans to raise about $40 billion in fiscal 2027 to help fund construction of artificial intelligence (AI) data centers.

Let’s take a closer look at the quarter, including the significant spending required to make it happen.

Image source: The Motley Fool.

Demand continues to accelerate

Oracle’s cloud infrastructure business, which rents computing power (much of it used for AI training and inference), once again led the results. The segment’s revenue increased 93% year-over-year to $5.8 billion in the fiscal fourth quarter. And the quarterly trends are just as impressive as the headline numbers. From 55% to 68%, 84% and now 93%, the sector’s year-on-year growth rate accelerated in each quarter of fiscal 2026.

Total cloud revenue, which combines cloud infrastructure and the company’s cloud applications, increased 47% to $9.9 billion.

And Oracle’s profitability was noteworthy. Non-GAAP (adjusted) earnings per share increased 24% to $2.11. Even excluding some one-time investment gains during the period, adjusted earnings per share increased by 20%.

Then there is the backlog.

Oracle’s remaining performance obligations (RPO) – revenue from contracts the company has not yet delivered – increased by $85 billion in the quarter alone, to $638 billion. This shows how astounding this figure is: a year ago it was around $138 billion. And your backlog will start to turn into revenue at a faster rate. CFO Hilary Maxson said on the company’s fiscal fourth-quarter earnings call that Oracle expects to recognize about 12% of RPO as revenue over the next 12 months.

Management expects this trend to continue, with overall cloud revenue growing 57% to 63% on a constant currency basis in the first quarter of fiscal 2027. And CEO Clay Magouyrk said on the call that Oracle plans to bring nearly a gigawatt of computing capacity online this quarter. This represents the amount the company added during the entire fiscal year 2026.

Paying for all your growth

However, building data centers at this rate is prohibitively expensive.

Oracle’s capital spending in fiscal 2026 totaled $55.7 billion, more than 2.5 times what it spent a year earlier. So even though the company’s operating cash flow increased 54% to $32 billion, its free cash flow for the year was negative $23.7 billion.

To support these capital expenditures, Oracle raised $43 billion in debt and $5 billion in equity during fiscal 2026, with interest expense for the year increasing 29% to $4.6 billion.

Notably, the roughly $40 billion the company plans to raise in fiscal 2027 includes its previously announced $20 billion market share program, a plan to gradually sell newly issued shares to dilute existing shareholders.

But customers are taking some of the burden off their hands. Oracle says the prepaid and customer-provided hardware portion of its large AI contracts now total $75 billion.

“This significantly reduces the amount of capital Oracle must raise to build AI data centers,” Oracle said in its fiscal fourth-quarter earnings call.

Still, most of the recent backlog growth has come from a handful of large AI contracts, including a reported $300 billion five-year deal with OpenAI signed last year. The maker of ChatGPT is reportedly still unprofitable and filed confidential filings for an initial public offering just days before Oracle’s report. If customers of that size can’t pay the compute costs they’ve contracted for, a meaningful portion of Oracle’s backlog will never become profitable.

today’s change

(-2.21%) $-4.55

current price

$201.26

Key data points

market capitalization

$592 billion

work range

$198.18 -$212.48

52 week range

$134.57 -$345.72

volume

46.1M

average volume

27.2M

gross profit

64.30%

dividend yield

0.97%

So what should investors think about the downturn?

After the after-hours decline, the stock’s forward price-to-earnings ratio stands at about 24. For a company growing this quickly, that valuation certainly seems reasonable.

But I think the market’s hesitation is understandable. Oracle is borrowing and issuing stock at an unprecedented scale, and the payoff depends on customers executing the largest contracts in the history of the technology industry. The demand is clearly there. However, the stock may still be volatile until free cash flow returns to positive territory. After all, when a company is spending this aggressively, investors may want more proof before paying for growth.