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Breaking Down Oracle, the AI Trade, and the Outlook for Tech Earnings
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Key Takeaways
Oracle's recent earnings release came under heavy scrutiny.
Mag 7 members are expected to see 16.9% earnings growth on 16.4% higher sales in Q4.
Tech will continue being the primary earnings growth driver in coming periods.
Oracle’s (ORCL - Free Report) relationship with OpenAI has become a never-ending source of market angst, as the tie-in reminds many of questionable vendor-financing practices from the late 1990s. Tied to Oracle’s OpenAI exposure are questions about the company’s financial health and its ability to fund its data center expansion plans.
The December 10th quarterly release, which was, at best, mixed, added to Oracle’s woes. Oracle missed consensus revenue and margin expectations and raised its capital expenditure (capex) outlook. The stock’s negative reaction to this quarterly release contrasted with the prior quarterly release in early September, when the stock jumped by more than a third.
When investors typically think of the big Tech players, like Microsoft (MSFT - Free Report) or Alphabet (GOOGL - Free Report) or even Oracle, they instinctively assume fortress balance sheets and ungodly amounts of operating cash flows. Those assumptions are misplaced in the case of Oracle, as it has been relying lately on the debt markets to fund its ever-rising data center buildout-related capital expenditures.
Oracle’s capex outlay totaled $21.2 billion in fiscal year 2025 (FY ends in May), up from $6.7 billion in FY 2024. The company generated $20.8 billion of free cash flow in FY 2025, meaning it was free cash flow negative for the year. The expectation for the current year (FY 2026) is that Oracle’s $50 billion capex budget is approximately double the amount of operating cash flows it is expected to generate. In fact, Oracle will most likely be free cash flow negative in fiscal year 2027 as well, which means that it will need to tap the debt market to fund its capex budget.
The chart below provides an overview of Oracle’s debt load and the comparable measure for Microsoft. Long-term debt as a share of the company’s total capital is not the only, nor even the best, measure of balance-sheet leverage, but it is a simple and easily understood indicator of financial flexibility.
Image Source: Zacks Investment Research
We should keep in mind that Oracle isn’t in any financial distress, as it currently has an ‘investment grade’ credit rating from the rating agencies. That said, its credit rating of BBB (from S&P) is the lowest rung of investment-grade credit rating.
We are all familiar with the market’s concerns about the broader ‘AI trade’, which ranges from the ‘bubble narrative’ at one extreme to reasonable questions about the monetization of AI investments at the other.
The chart below shows the three-month performance of Oracle shares relative to Alphabet, Microsoft, the Zacks Tech sector, and the S&P 500 index.
Image Source: Zacks Investment Research
The ongoing issues in Oracle shares are not a reflection of those AI concerns, as the chart above clearly shows, but rather a function of the aforementioned OpenAI exposure and concerns about its financial health. We would have seen far more solidarity from Microsoft and Alphabet with Oracle in the above period had the overriding issue been the ‘AI trade’.
One key performance metric that took center stage in the Oracle story is Remaining Performance Obligations (RPO), which reached $523 billion this quarter, up $455 billion from the preceding quarter. For reference, the comparable number for Microsoft reached $392 billion in the company’s latest quarterly report.
Think of this key performance metric as Oracle’s backlog or future revenues had jumped by an eye-popping $317 billion in the preceding quarter. The bearish narrative on Oracle notes that $300 billion of the preceding quarter’s $317 billion RPO growth was attributable to OpenAI.
It is this elevated level of customer concentration risk, coupled with Oracle’s relatively stretched financial health, that has been weighing on the stock lately.
A fair assessment of the evolving Oracle story is that while there is undoubtedly more uncertainty and risk associated with its RPO (or backlog) getting converted into future revenues, particularly say relative to Microsoft or Alphabet, it is nevertheless a key element of the company’s growth profile and its status as a critical player in the emerging AI world.
In other words, no one should be under the impression that this is a second coming of Enron or other such dubious characters from our collective past.
The chart below provides a 10-year comparison of Oracle valuation relative to Microsoft, using the forward 12-month P/E multiple. As you can see here, Oracle shares broke away from their historically discounted valuation to Microsoft only in May 2025, but have now reversed all of those gains.
Image Source: Zacks Investment Research
This 10-year history shows that Oracle shares have commanded as high as 66% premium (September 2025) to Microsoft share to a 55% discount (November 2020), with a 10-year median of 28% discount. The stock is currently trading at an 18% discount to Microsoft shares (23.6X for Oracle vs. 28.7X for Microsoft).
The lower discount relative to history makes sense when seen in the context of Oracle’s emerging status as a key player in the emerging AI world. Oracle bulls would likely argue that there is no justification for the ‘new Oracle’ to trade at a discount to Microsoft going forward, notwithstanding its balance sheet vulnerability.
Tech Earnings Outlook
The chart below shows the earnings and revenue growth outlook for the Zacks Tech sector on a quarterly basis, where we highlight expectations for 2025 Q4 in the context of what the sector achieved in the preceding two quarters and what is expected in the following three quarters.
Image Source: Zacks Investment Research
The Tech sector has been critical to driving aggregate earnings growth for the last 9 quarters (since 2023 Q3), and the above chart shows that it is expected to continue playing that role in the coming periods as well.
Please note that the Tech sector has been consistently enjoying positive estimate revisions over the past year, and we saw the same trend at play since the start of 2025 Q4 in October. In fact, had it not been for positive revisions to Tech sector estimates, aggregate Q4 earnings estimates for the S&P 500 index would be modestly down since the start of October.
The chart below shows the sector’s earnings growth picture on an annual basis.
Image Source: Zacks Investment Research
The positive revisions trend that we referenced for the Tech sector in the context of 2025 Q4 earnings estimates is very much in place for full-year 2026 estimates as well, as the chart below shows.
Image Source: Zacks Investment Research
The Tech sector is not ordinary; it accounts for nearly a third of S&P 500 earnings, as the chart below shows.
Image Source: Zacks Investment Research
Earnings Outlook for the Mag 7
The Mag 7 group is generally seen as mega-cap Tech players. However, in the Zacks sector classification system, two of the Mag 7 players are not part of the Zacks Tech sector; we place Amazon in the Zacks Retail sector and Tesla in the Zacks Auto sector. Both of these sectors are Zacks innovations, as the ‘official’ Standard & Poor’s industry classification does not have stand-alone sectors for the retail and auto spaces.
For 2025 Q4, the Mag 7 group is expected to produce +16.9% earnings growth on +16.4% higher revenues, as the chart below shows.
Image Source: Zacks Investment Research
The chart below shows the Mag 7 group’s earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
As you can see above, the group’s 2026 earnings are currently expected to be up +16.6%, followed by +18% in 2027.
The important factor to keep in mind is that the Mag 7 earnings outlook is steadily improving, as the chart below shows.
Image Source: Zacks Investment Research
Please note that the Mag 7 group is on track to bring in 26.4% of all S&P 500 earnings in 2026, up from 23.2% of the total in 2024 and 11.7% in 2019. Regarding market capitalization, the Mag 7 group currently carries a 34.6% weight in the index.
2025 Q4 Earnings Season Scorecard
Last week’s Oracle earnings report was for the company’s fiscal quarter ending in November, which we and other research organizations count as part of the December-quarter tally. Oracle is hardly alone in this respect, and quarterly results from the likes of FedEx, Nike, Adobe, and others fall in the same category. Through Friday, December 19th, we have seen such Q4 results from 18 S&P 500 members.
Total earnings for these 18 index members are up +32.2% from the same period last year on +9% higher revenues, with 83.3% beating EPS estimates and 72.2% beating revenue estimates.
The comparison charts below put the Q4 earnings and revenue growth rates from these companies in a historical context.
Image Source: Zacks Investment Research
The comparison charts below show the Q4 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
The chart below shows current Q4 earnings and revenue growth expectations for the S&P 500 index in the context of the preceding 4 quarters and the coming three quarters.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on a calendar-year basis.
Image: Bigstock
Breaking Down Oracle, the AI Trade, and the Outlook for Tech Earnings
Key Takeaways
Oracle’s (ORCL - Free Report) relationship with OpenAI has become a never-ending source of market angst, as the tie-in reminds many of questionable vendor-financing practices from the late 1990s. Tied to Oracle’s OpenAI exposure are questions about the company’s financial health and its ability to fund its data center expansion plans.
The December 10th quarterly release, which was, at best, mixed, added to Oracle’s woes. Oracle missed consensus revenue and margin expectations and raised its capital expenditure (capex) outlook. The stock’s negative reaction to this quarterly release contrasted with the prior quarterly release in early September, when the stock jumped by more than a third.
When investors typically think of the big Tech players, like Microsoft (MSFT - Free Report) or Alphabet (GOOGL - Free Report) or even Oracle, they instinctively assume fortress balance sheets and ungodly amounts of operating cash flows. Those assumptions are misplaced in the case of Oracle, as it has been relying lately on the debt markets to fund its ever-rising data center buildout-related capital expenditures.
Oracle’s capex outlay totaled $21.2 billion in fiscal year 2025 (FY ends in May), up from $6.7 billion in FY 2024. The company generated $20.8 billion of free cash flow in FY 2025, meaning it was free cash flow negative for the year. The expectation for the current year (FY 2026) is that Oracle’s $50 billion capex budget is approximately double the amount of operating cash flows it is expected to generate. In fact, Oracle will most likely be free cash flow negative in fiscal year 2027 as well, which means that it will need to tap the debt market to fund its capex budget.
The chart below provides an overview of Oracle’s debt load and the comparable measure for Microsoft. Long-term debt as a share of the company’s total capital is not the only, nor even the best, measure of balance-sheet leverage, but it is a simple and easily understood indicator of financial flexibility.
Image Source: Zacks Investment Research
We should keep in mind that Oracle isn’t in any financial distress, as it currently has an ‘investment grade’ credit rating from the rating agencies. That said, its credit rating of BBB (from S&P) is the lowest rung of investment-grade credit rating.
We are all familiar with the market’s concerns about the broader ‘AI trade’, which ranges from the ‘bubble narrative’ at one extreme to reasonable questions about the monetization of AI investments at the other.
The chart below shows the three-month performance of Oracle shares relative to Alphabet, Microsoft, the Zacks Tech sector, and the S&P 500 index.
Image Source: Zacks Investment Research
The ongoing issues in Oracle shares are not a reflection of those AI concerns, as the chart above clearly shows, but rather a function of the aforementioned OpenAI exposure and concerns about its financial health. We would have seen far more solidarity from Microsoft and Alphabet with Oracle in the above period had the overriding issue been the ‘AI trade’.
One key performance metric that took center stage in the Oracle story is Remaining Performance Obligations (RPO), which reached $523 billion this quarter, up $455 billion from the preceding quarter. For reference, the comparable number for Microsoft reached $392 billion in the company’s latest quarterly report.
Think of this key performance metric as Oracle’s backlog or future revenues had jumped by an eye-popping $317 billion in the preceding quarter. The bearish narrative on Oracle notes that $300 billion of the preceding quarter’s $317 billion RPO growth was attributable to OpenAI.
It is this elevated level of customer concentration risk, coupled with Oracle’s relatively stretched financial health, that has been weighing on the stock lately.
A fair assessment of the evolving Oracle story is that while there is undoubtedly more uncertainty and risk associated with its RPO (or backlog) getting converted into future revenues, particularly say relative to Microsoft or Alphabet, it is nevertheless a key element of the company’s growth profile and its status as a critical player in the emerging AI world.
In other words, no one should be under the impression that this is a second coming of Enron or other such dubious characters from our collective past.
The chart below provides a 10-year comparison of Oracle valuation relative to Microsoft, using the forward 12-month P/E multiple. As you can see here, Oracle shares broke away from their historically discounted valuation to Microsoft only in May 2025, but have now reversed all of those gains.
Image Source: Zacks Investment Research
This 10-year history shows that Oracle shares have commanded as high as 66% premium (September 2025) to Microsoft share to a 55% discount (November 2020), with a 10-year median of 28% discount. The stock is currently trading at an 18% discount to Microsoft shares (23.6X for Oracle vs. 28.7X for Microsoft).
The lower discount relative to history makes sense when seen in the context of Oracle’s emerging status as a key player in the emerging AI world. Oracle bulls would likely argue that there is no justification for the ‘new Oracle’ to trade at a discount to Microsoft going forward, notwithstanding its balance sheet vulnerability.
Tech Earnings Outlook
The chart below shows the earnings and revenue growth outlook for the Zacks Tech sector on a quarterly basis, where we highlight expectations for 2025 Q4 in the context of what the sector achieved in the preceding two quarters and what is expected in the following three quarters.
Image Source: Zacks Investment Research
The Tech sector has been critical to driving aggregate earnings growth for the last 9 quarters (since 2023 Q3), and the above chart shows that it is expected to continue playing that role in the coming periods as well.
Please note that the Tech sector has been consistently enjoying positive estimate revisions over the past year, and we saw the same trend at play since the start of 2025 Q4 in October. In fact, had it not been for positive revisions to Tech sector estimates, aggregate Q4 earnings estimates for the S&P 500 index would be modestly down since the start of October.
The chart below shows the sector’s earnings growth picture on an annual basis.
Image Source: Zacks Investment Research
The positive revisions trend that we referenced for the Tech sector in the context of 2025 Q4 earnings estimates is very much in place for full-year 2026 estimates as well, as the chart below shows.
Image Source: Zacks Investment Research
The Tech sector is not ordinary; it accounts for nearly a third of S&P 500 earnings, as the chart below shows.
Image Source: Zacks Investment Research
Earnings Outlook for the Mag 7
The Mag 7 group is generally seen as mega-cap Tech players. However, in the Zacks sector classification system, two of the Mag 7 players are not part of the Zacks Tech sector; we place Amazon in the Zacks Retail sector and Tesla in the Zacks Auto sector. Both of these sectors are Zacks innovations, as the ‘official’ Standard & Poor’s industry classification does not have stand-alone sectors for the retail and auto spaces.
For 2025 Q4, the Mag 7 group is expected to produce +16.9% earnings growth on +16.4% higher revenues, as the chart below shows.
Image Source: Zacks Investment Research
The chart below shows the Mag 7 group’s earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
As you can see above, the group’s 2026 earnings are currently expected to be up +16.6%, followed by +18% in 2027.
The important factor to keep in mind is that the Mag 7 earnings outlook is steadily improving, as the chart below shows.
Image Source: Zacks Investment Research
Please note that the Mag 7 group is on track to bring in 26.4% of all S&P 500 earnings in 2026, up from 23.2% of the total in 2024 and 11.7% in 2019. Regarding market capitalization, the Mag 7 group currently carries a 34.6% weight in the index.
2025 Q4 Earnings Season Scorecard
Last week’s Oracle earnings report was for the company’s fiscal quarter ending in November, which we and other research organizations count as part of the December-quarter tally. Oracle is hardly alone in this respect, and quarterly results from the likes of FedEx, Nike, Adobe, and others fall in the same category. Through Friday, December 19th, we have seen such Q4 results from 18 S&P 500 members.
Total earnings for these 18 index members are up +32.2% from the same period last year on +9% higher revenues, with 83.3% beating EPS estimates and 72.2% beating revenue estimates.
The comparison charts below put the Q4 earnings and revenue growth rates from these companies in a historical context.
Image Source: Zacks Investment Research
The comparison charts below show the Q4 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
The chart below shows current Q4 earnings and revenue growth expectations for the S&P 500 index in the context of the preceding 4 quarters and the coming three quarters.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on a calendar-year basis.
Image Source: Zacks Investment Research
For a detailed view of the evolving earnings picture, please check out our weekly Earnings Trends report here >>>>Q4 Earnings: Tech Expected to Remain Growth Driver