Shares of software and cloud infrastructure specialist Oracle(NYSE:ORCL) It’s been a serious hit recently. The stock has plummeted over the past six months, down more than 50% as of this writing.
The tech stock’s decline comes as investors fret about the company’s staggering capital spending plans and the debt it will need to fund its aggressive artificial intelligence (AI) data center buildout.
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But that doesn’t mean the underlying business is in trouble. In fact, Oracle just reported another quarter of accelerating revenue growth and soaring profits.
So, while its stock price has been hammered, its underlying business is accelerating and its backlog is surging. Is this a buying opportunity?
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Oracle’s third-quarter earnings highlights that its business is running at full speed. The company’s total revenue was US$17.2 billion, a year-on-year increase of 22%. This marked a significant acceleration from the 14% year-over-year growth in the fiscal second quarter.
This growth has resulted in huge profits. Oracle’s earnings per share increased 21% year over year to $1.79.
The strong performance in the quarter was primarily driven by the company’s cloud business. Cloud infrastructure revenue was $4.9 billion, a year-over-year increase of 84%. This is a rapid acceleration from the previous quarter’s 68% growth.
Even more encouraging than this quarter’s strong financial results is the substantial amount of future business Oracle has secured. The company’s remaining performance obligations (RPO), or revenue from contractual obligations that have yet to be recognized, soared to a staggering $553 billion, up 325% year over year.
This incredible backlog is the result of massive AI contracts. Additionally, many of the contracts behind the massive backlog are structured so that customers pay for the equipment up front or supply their own hardware.
“Much of the increase in RPO in Q3 is related to large-scale artificial intelligence contracts, and Oracle does not expect to raise any incremental capital to support these contracts, as the majority of the equipment required is either funded up front through customer upfront payments so that Oracle can purchase GPUs, or customers purchase GPUs and supply them to Oracle,” the company noted in its third-quarter earnings report.
This dynamic is crucial because it means Oracle may not have to bear the full financial burden of its infrastructure expansion.
For investors, such a large backlog is extremely valuable. It provides management with clear visibility into its growth profile and lets investors understand how growth will unfold over time. Additionally, as these customers lock in the ability to perform long-term AI training and inference workloads, Oracle is solidifying its position as a core pillar of the AI ​​revolution.
The main reason for the stock’s recent weakness may be the cost of filling a large backlog of orders. Management expects capital expenditures of approximately $50 billion in fiscal 2026 to support growing AI demand.
This is a significant capital expenditure, and some investors are understandably concerned about the company’s balance sheet, financing plans, and near-term free cash flow, or operating cash flow minus capital expenditures.
But the stock’s brutal sell-off over the past six months has arguably priced in those risks.
With shares falling, Oracle is currently trading at forward price-to-earnings ratio About 19. That’s a very reasonable valuation for a company with revenue and profit growth of over 20% year over year.
For context, the broad market’s forward P/E ratio is slightly higher at 21 as of this writing. The fact that shares of fast-growing, high-margin software and infrastructure giants like Oracle trade below the broader market average underscores how volatile market sentiment can be. The stock’s pullback arguably helps digest the risks associated with Oracle’s capital spending plans.
But if Oracle can successfully convert its $500 billion backlog into recognized revenue while maintaining its profitability, the stock may be cheap right now in hindsight.
While a heavy investment cycle brings some near-term risk and capex concerns, the underlying demand for Oracle Cloud Infrastructure is undeniable. I believe now is a good time to buy Oracle stock for long-term investors willing to tolerate some volatility.
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Daniel Sparks and his clients have no positions in any of the stocks mentioned. The Motley Fool has a position and recommends Oracle. The Motley Fool has a disclosure policy.
Oracle stock has lost more than half its value in six months. Maybe it’s finally time to buy. Originally posted by The Motley Fool
