Enterprise software and cloud computing major Oracle (NYSE:ORCL) surprised the market when it released a significantly better-than-expected earnings report for the first quarter of its 2026 fiscal year.
Oracle also announced a massive new contract with OpenAI, giving it yet another positive boost. As a result, shares of ORCL rose by more than 25 percent in a stretch of just 5 days thereafter. But will Oracle’s stock keep going up from here, or is ORCL set up for a correction once the post-earnings enthusiasm wears off?
Just How Good Was the Earnings Report?
At first glance, Oracle’s fiscal Q1 earnings report doesn’t look spectacular enough to warrant a double-digit increase in share prices. Revenue was up a respectable 12 percent to a total of $14.9 billion.
Meanwhile, GAAP earnings per share were actually down 2 percent and non-GAAP EPS only rose 6 percent. Free cash flow, meanwhile, contracted into negative territory.
What stunned investors and Wall Street, however, was the massive spike in Oracle’s backlog of remaining performance obligations.
RPOs for the quarter totaled $455 billion, a 359 percent increase over the year-ago quarter. Impressively, this gigantic increase was the result of just four multi-billion-dollar contracts that Oracle signed during the quarter. These contracts were with three AI hyperscalers, namely Amazon, Microsoft and Google. Revenue from these three key customers skyrocketed by 1,529 percent compared to the year-ago quarter.
A look at the revenue breakdown provided by Oracle for the quarter shows just how promising its cloud business could be going forward. Cloud infrastructure revenues grew at a year-over-year rate of 55 percent to reach $3.3 billion, while overall cloud computing revenue grew at a rate of 28 percent.
For the full year, management is expecting to see cloud infrastructure revenue rise by 77 percent to reach a total of $18 billion. By the end of the decade, Oracle is forecasting annual cloud infrastructure revenue of $144 billion, more than double the business’s entire trailing 12-month revenue at the time of this writing.
Another huge tailwind for Oracle was its contract with OpenAI for $300 billion. Under the terms of this contract, Oracle will supply massive data center infrastructure to the startup, providing about half of OpenAI’s planned US data centers.
New contracts with AI hyperscalers aren’t the full extent of Oracle’s effort to lean into AI. The business is expected to reveal a new AI service next month that allows users to apply a variety of different LLMs to the data they already have stored with Oracle. This move could almost immediately create a massive amount of new value for existing Oracle customers by allowing them to derive insights from pre-existing data.
How High Is Oracle’s Valuation Now?
Due to their recent rise, shares of Oracle are now trading at significant premiums. The stock currently trades at 67.6 times earnings and 14.3 times sales, while Oracle’s overall market cap has expanded to over $830 billion. The price-to-operating-cash-flow ratio is also extremely high at 86.7.
Of course, this valuation is baking significant forward growth in. With management promising massive increases in future revenue and expecting to sign additional contracts in the near future, it’s quite possible that Oracle could manage to support its seemingly very high price tag.
As of the time of this writing, Oracle’s consensus price target was $330.34, implying an upside of around 13 percent from its most recent trading price of $292.18.
How Risky Is Oracle?
Ordinarily, buying a stock on expectations of massive revenue growth multiple years down the line would be a high-risk proposition.
While this is still true to some extent in Oracle’s case, it’s worth noting that the increase in cloud infrastructure revenue management is forecasting is already largely reflected in Oracle’s RPOs. This takes some of the uncertainty out of the equation, allowing investors to have a bit more confidence when it comes to the predictability of revenue growth.
Oracle’s recent positive surprises are also the result of massive contracts with hyperscalers, business that will likely keep investing heavily in cloud infrastructure. Oracle is well-positioned to benefit from long-term growth in cloud demand, especially with its new OpenAI contract.
On the downside of Oracle’s risk profile is the fact that its current valuation is heavily tied to AI, a technology that the market may eventually re-evaluate.
Recent research from MIT suggests that 95 percent of corporate AI initiatives currently fail to produce returns, while Oracle’s surge itself is being presented by more bearish observers as fresh evidence of an AI-fueled market bubble. If the market does eventually revise its estimates of AI’s economic value downward, it’s likely that Oracle and many of the firms it does business with could see their share prices move significantly lower.
So, Will Oracle Shares Keep Rising?
Right now, Oracle appears to be in a solid position for long-term growth that could keep upward pressure on its share prices. With so many new contracts already signed and more potentially on the way, Oracle could keep building its backlog and securing a predictable stream of revenue growth in the years to come.
It’s also worth noting that Oracle’s profitability is already fairly high, putting it in a good position to drive bottom-line growth. In the last 12 months, for instance, Oracle’s net margin exceeded 20 percent. With top-line growth set to surge in the coming years, Oracle’s future earnings could be sufficient to justify the stock’s high price tag today.
While it would be far from unusual to see a modest downward correction as the sheer enthusiasm of last week’s developments wears off, Oracle shares will likely maintain their upward trajectory as the business secures new contracts, deploys its own AI tools and generates revenue and earnings growth from the commitments it has already put in place.
Though an AI correction could send ORCL shares lower, the stock may be an attractive buy for investors who remain bullish on AI and are risk-tolerant enough to ride out volatility in exchange for the potential of above-average returns.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.