Bernstein: Oracle’s AI expansion ledger: Funding needs and margin guidance beat expectations, while renewals and construction remain tests

What new guidance changed investor expectations?

Oracle provided multiyear guidance at its financial analyst meeting. Bernstein said the overall financial outlook was significantly better than market expectations; the company’s shares rose about 10% during its presentation.
The company expects free cash flow to turn positive in the second half of fiscal 2028, which Bernstein said was earlier than the market expected. Management also expects fiscal 2030 revenue to exceed 225 billion dollars, adjusted operating margin to exceed 40%, and adjusted earnings per share to exceed 21 dollars, up from 8.10 dollars in fiscal 2027.
Bernstein maintained its outperform rating and 325 dollar price target, saying the valuation does not yet reflect future growth in revenue, earnings and free cash flow. The firm has not yet updated its model to reflect the new guidance.

Management said an additional 20 billion dollars must be raised to build the contracted data center capacity and move toward positive free cash flow, comprising 10 billion dollars each in debt and equity financing; the total matches Bernstein’s previous estimate.
The company said about half the financing for data center construction will come from a combination of vendor financing, customer prepayments, customer-supplied hardware and the above 20 billion dollars. Financing costs are included in the company’s margin, earnings-per-share and free-cash-flow guidance.
Peak investment is still ahead: Bernstein’s unupdated model projects capital expenditure of 93.075 billion and 97.945 billion dollars in fiscal 2027 and 2028, respectively, above the 55.663 billion dollars in fiscal 2026. The company expects its net debt-to-EBITDA ratio to fall below 3.5 times in fiscal 2029.

Management expects a gross margin of 35% for the AI computing capacity business and an operating margin of 34% at steady state. For an illustrative 1-gigawatt, five-year contract, returns on investment are approximately 28% under both self-funded construction and vendor-financed hardware models; the customer-supplied hardware model exceeds 20%.
Margins do not rise continuously during the expansion. Bernstein’s existing model projects the company’s overall adjusted gross margin will fall from 67.1% in fiscal 2026 to 47.4% in fiscal 2029, while its adjusted operating margin falls from 42.9% to 39.0% over the same period. These figures differ in timing and scope from management’s guidance for an overall operating margin above 40% in fiscal 2030.

Long-term revenue depends on customer renewals. Oracle said its cloud infrastructure data centers can be configured with CPUs, GPUs or dedicated inference chips, and expects renewal contracts five to six years from now to have similar or higher margins. Bernstein believes market concerns about the durability of demand may persist in the near term.
The company plans to build approximately 10 gigawatts of data center capacity, with five large sites accounting for half. It said it has built in room to address potential delays and is coordinating development with end customers. Equipment can be shifted between capacity contracts, which also helps address delays at individual projects.
Bernstein believes execution concerns may recur until the main construction phase ends before the close of calendar 2028.