This article was originally published on I/O Fund on July 18, 2025
Oracle is a stock that was long-forgotten about in the cloud era when the Big 3 -- Microsoft, Google and Amazon -- and many best-of-breed companies stole the spotlight. Oracle struggled to report growth of any kind with some years in the red and other years rarely reporting over 5% growth during cloud’s glory years.
But today, Oracle wants to be taken seriously as a strong AI contender, and it is quickly positioning itself to lead among Microsoft, Amazon and Alphabet when it comes to AI-driven cloud growth over the next few years.
The stock has done quite well off the April lows following some impressive growth forecasts in June, including guidance for a 20-point acceleration in Cloud IaaS growth to >70% YoY. Yet it will take a lot more than one earnings report to convince the market that the enterprise giant has staying power.
Below, we look into the sleepy enterprise giant to help determine if Oracle has what it takes to compete with innovative best-of-breed companies and the Big 3 who are spending tens of billions to fortify their moats in the fierce arms race of AI.
The Economics of OpenAI Stargate Expansion
At the beginning of July, OpenAI signed an agreement to rent 4.5 GW of data center capacity from Oracle in the US. This marks one of the largest single data center leasing deals in history, with 4.5 GW being approximately 25% of the current operational data center capacity in the US.
Based on prior estimates for its Stargate data center in Abilene, the 4.5 GW expansion could require as many as 2.25 million GPUs, or ~$94 billion worth of Nvidia’s GB200 NVL72 racks.
Analysts from BNP Paribas have estimated that 4.5 GW of capacity could generate $30 billion to $60 billion in annual revenue for Oracle, depending on hourly GPU rental prices.
However, 4.5 GW of capacity is not cheap. BNP places the cost of this buildout at $180 billion to $225 billion, stating that it is unclear if Oracle will have to finance the project itself or if Stargate partners including Microsoft and SoftBank will contribute.
Oracle had reportedly purchased ~400,000 Blackwell GPUs worth $40 billion in late May to expand the Abilene data center to support OpenAI, yet this is likely just a fraction of what is needed for this new mega-deal.
Oracle to See $30 Billion In Annual Revenue from Major Cloud Deal
Just a few days prior to the 4.5 GW announcement, Oracle announced that it had signed multiple cloud service agreements, including a major contract expected to contribute more than $30 billion in annual revenue starting in FY28. To put that in perspective, this is nearly 25% larger than Oracle’s entire cloud business in FY25, and 3x its entire cloud infrastructure business.
Jefferies analysts pointed out that Street estimates currently model $46 billion in Cloud IaaS revenue in fiscal 2028 on $93 billion total revenue, suggesting the new deal alone is worth two-thirds of projected IaaS revenue. Jefferies added that while the ramp is years out, the magnitude unlocks potential upward revisions to Oracle’s fiscal 2029 revenue target of $104 billion.
Oracle did not name the customer, though it is widely expected that OpenAI is behind this lucrative deal. This would place each GW of capacity at around $6.67 billion in revenue annually, or ~$555 million per month, based on the 4.5 GW scale.
Oracle’s Cloud IaaS Guided to 70% Growth this Fiscal Year
During its Q4 report in early June, Oracle projected substantial acceleration in its cloud business in fiscal 2026, fueled by strong AI demand and cloud consumption.
Total cloud growth (IaaS & SaaS) was guided to accelerate to more than 40% in FY26 up from 24% in FY25. This will equal $34.2 billion in revenue and implies the segment may exit FY26 well in the 50% YoY range.
Cloud IaaS (OCI) growth was guided to accelerate to more than 70% in FY26 up from 50% in FY25, equaling $17.5 billion in revenue. Assuming sequential revenue growth is stronger in the back half, IaaS revenue could potentially accelerate to more than 30 points to the low to mid-80% range.
Oracle Cloud Infrastructure consumption revenue is expected to grow faster than the 62% YoY increase reported in Q4.
Below is a chart showing how swiftly Oracle is expecting to accelerate IaaS revenue through FY26. Actual growth rates may vary should Oracle have a stronger H1 than H2.
Strong Database Growth Supports Oracle’s Cloud Acceleration
In our free stock analysis two months ago, we stated that Oracle’s ability to deliver low latency, high-performance AI at scale gives it a slight edge in the cloud. Oracle’s vector capabilities stand out given its database roots, and Oracle expects cloud database to be its third revenue driver in FY26 (behind IaaS and strategic SaaS). This is notable considering the bulk of Oracle’s database presence remains on-prem.
While cloud database growth outpaces SaaS growth at 31% YoY, it’s coming off quite a small base, at just $2.6 billion annualized in Q4, or ~$650 million quarterly. Within this segment, there were pockets of rapid growth, with Q4 MultiCloud database revenue from Azure, AWS and Google Cloud increasing 115% QoQ.
For FY26, Oracle projected triple-digit growth in MultiCloud database revenue to continue, building on Q4’s strong momentum, as it signaled an intent to double and triple cloud-dedicated datacenters. Oracle has 23 MultiCloud data centers in operation currently, and it is working to triple capacity, building 47 more MultiCloud data centers over the next 12 months.
Additionally, Oracle is aiming to double its Oracle Cloud@Customer data center footprint, from 29 live datacenters with 30 more being built in FY26. Management noted that Cloud@Customer data center revenue increased 104% YoY, and doubling capacity paves the way for this robust momentum to drive strong growth in FY26.
Considering its high on-prem presence, analysts questioned management about cloud database’s contribution to the 70% IaaS growth target and opportunities from cloud migration. Management did not place an exact number on FY26’s contribution, though CTO and chair Larry Ellison implied that every $1 billion in database support revenue could be worth $5 billion in the cloud, due to compute, networking, storage and other fees associated with cloud databases.
For another look at Oracle’s AI advantages and vector capabilities, read Oracle Stock Outlook: Revenue Could Double by FY2029, yet Targets Seem Lofty.
Oracle Expects RPO to Double to More Than a Quarter Trillion
One of the more impressive forecasts Oracle doled out in Q4 was its RPO growth target for FY26. Management stated that RPO was expected to increase more than 100% in the upcoming fiscal year, which would place RPO at well over one-quarter trillion.
Oracle reported $138 billion in RPO in Q4, up $8 billion QoQ and up 41% YoY. Thus, management is forecasting RPO to rise to approximately $275 billion to $280 billion, a significant YoY increase given Oracle only added $40 billion YoY in RPO in FY25. Oracle has previously been vocal about how its cost-efficient AI services with multi-cloud database support help it win larger deals, and this is likely a major factor in FY26’s lofty RPO target.
Cloud RPO has been robust and will likely be primary driver in reaching this guidance, boosted by Oracle’s involvement in Stargate. Cloud RPO is approximately $110 billion, rising 56% YoY in FY25, on top of 80% YoY growth in FY24. This growth outpaces both Amazon and Microsoft, with Amazon’s backlog up 20% YoY to $189 billion, while Microsoft’s rose 33% YoY to $315 billion.
Analysts had questioned management about Stargate’s impact on RPO and IaaS growth forecasts, and while they were quite vague about the project’s contribution, CTO and chairman Larry Ellison said that “if Stargate turns out to be everything is advertised, then we've understated our RPO growth.” This implies further upside beyond one-quarter trillion should Stargate continue to expand towards its half a trillion dollar investment size.
Additionally, Oracle’s RPO provides strong visibility into FY26 revenue, with 33% of total RPO expected to be recognized over the next 12 months. This suggests Oracle will recognize ~$45.5 billion of its backlog, or 68% of its guided $67 billion in revenue for the year.
Understanding Oracle’s Capex Strategy Amidst Surging Demand
Capex will remain elevated in FY26 as Oracle works to build out capacity to meet high demand, especially considering management expects RPO to increase by more than $130 billion during the year. Costs for the upcoming 4.5 GW expansion are likely to be tens to hundreds of billions as well, depending on how much Oracle will contribute itself.
For FY26, Oracle expects capex to be greater than $25 billion, or up ~18% YoY from $21.2 billion in FY25. It’s also important to point out here that the $21.2 billion figure was well ahead of Oracle’s guidance from fiscal Q3 for around $16 billion in capex. This is because Q4 capex surged 55% QoQ to $9.1 billion.
CEO Safra Catz also stated on Q4’s call that she believes the $25 billion forecast “may turn out to be understated.” Think of it this way – how does Oracle bring supply to meet demand given one quarter trillion in RPO and the $30 billion deal would be more than 10x the current size of its cloud business today? Oracle is already short of capacity with cloud growth accelerating, suggesting capex may indeed need to be much higher to support these massive newer deals.
While this may seem like peanuts in the hyperscale space, with Amazon projected to spend >$105 billion this year on capex, Oracle’s spending is rather substantial relative to its size. For example, Oracle went from spending the least capex to revenue out of Big Tech in early 2022 at just 9%, yet it now committed 37% of revenue to capex in FY25. This far outpaced Meta at under 26% and Alphabet and Amazon in the mid-teens.
Implications of Oracle’s Elevated Capex
One downside to this high relative capex is the pressure that it places on Oracle’s cash flows, especially if capex is much higher than originally anticipated. Analysts also pointed out another problematic scenario for investors that may arise from this soaring capex.
Q4’s 55% QoQ surge in capex far outpaced operating cash flow, which rose less than 4% QoQ to nearly $6.2 billion. As a result of capex being 50% higher than OCF, free cash flow was ($2.9 billion) for the quarter.
And for the first time, Oracle’s spent more on capex than it generated from operations, pushing FCF into negative territory for the year at ($394 million).
For FY26, Oracle’s capex forecast risks another year where negative FCF is possible. To avoid this, Oracle would have to grow its operating cash flow in excess of 25% YoY, a significant acceleration from just 11.5% YoY growth in FY25. This raises the question of how Oracle will continue to fund dividends and buybacks while simultaneously (and aggressively) expanding capacity.
Consider Oracle’s liquidity profile as of Q4, with 9x debt to cash -- $10.2 billion in cash and equivalents and $92.6 billion in debt. Maintaining this capex trajectory, potentially at $55B+ over the next two years, will likely require Oracle to raise more debt.
Analysts from Barclays already see potential for substantial debt raises through FY27 to support this capex intensity, buybacks and dividends. Barclays estimates Oracle could raise $10 billion in both FY26 and FY27 at a 5% borrowing cost, which could add up to $300 million in interest expense, weighing on earnings growth.
The payoff for this elevated capex is maintaining cloud revenue acceleration over the next eight to twelve quarters, as cloud will be instrumental in Oracle meeting or exceeding its long-term growth targets.
Can Oracle Become the Next $1 Trillion AI Stock?
The biggest question here for long-term shareholders is if this AI-driven cloud acceleration can propel Oracle to become the next $1 trillion company.
Oracle is in the middle of a profound reinvention of its business model, migrating from a low-growth, license-based model to a high-growth, AI cloud infrastructure engine. Driving this pivot are record-breaking partnerships and cloud deals and robust industry-wide momentum. Yet does the company have what it takes to succeed against a formidable trio of Microsoft, Amazon and Alphabet in the cloud?
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It has the potential to succeed, but I believe they will face challenges in talent acquisition. Being in this industry, I know only a few people working at Oracle, whereas I have many colleagues at other hyperscalers. Long Oracle since April.