Oracle isn’t answering the hardest questions about its AI plans

Oracle significantly raised its long-term financial targets on Thursday during a meeting with analysts at its conference in Las Vegas. But unlike the first unveiling of those targets a year ago, and Oracle’s quarterly report last month that included even more blowout numbers, investors yawned. Oracle’s share price slipped over 2% in after-hours trading following Thursday’s meeting.

Granted, expectations are already high for a very large company that has doubled its market capitalization in a little over a year. Oracle used the same conference last September to project a significant jump in revenue over the next five years, due to booming demand for the types of artificial intelligence computing services the company is building into its extensive network of data centers.

Oracle got another big boost last month following its quarterly report that included blowout growth in its contracted future revenue, mostly fueled by a massive $300 billion contract with OpenAI. The company said Thursday that new deals with other players like Meta Platforms since that report have added even more to its backlog. Oracle now expects annual revenue to hit $185 billion in the fiscal year ending in May 2029. That is more than triple the company’s current annual revenue and a 78% jump from the target the company provided last year for the same fiscal period.

Oracle’s long-term targets imply that it can average a little over 30% annual revenue growth over the next five years. That would be a feat the 48-year-old company hasn’t managed since the ‘90s, according to data from S&P Global Market Intelligence. Oracle also issued even more ambitious growth targets for per-share earnings over the next few years—likely an attempt to counter recent concerns about the profitability of serving AI workloads.

What Oracle didn’t say is how it expects to pay for the very expensive expansion of its network that will be needed to generate such returns. Powering AI workloads first requires pricey chips from companies like Nvidia and AMD, and the components to run them in data centers. The company’s capital expenditures exceeded its operating cash flow for the first time since 1990 in its latest fiscal year that ended in May.

That is likely just the start of it. Wall Street expects Oracle’s negative free cash flow to continue for the next three fiscal years, with cash burn for the period totaling nearly $29 billion by the end of fiscal 2028, according to consensus estimates from Visible Alpha. In a report following Thursday’s meeting, Brad Reback of Stifel said investors still need to gain comfort with Oracle’s ability to drive strong earnings growth “even as the shift to a capex centric business model alters the current margin profile."

Some temperance is overdue in the AI space. The past month alone has seen an exhausting pace of announcements from companies like OpenAI, Meta, Nvidia, AMD, Broadcom and Arm Holdings, just to name a few. Many of these announced plans depend greatly on the ability of OpenAI to scale its future business significantly from the $13 billion a year in revenue that it generates now. AMD’s stock price has nonetheless surged 42% since the announcement of its deal with the ChatGPT parent earlier this month.

Oracle’s ability to live up to its lofty projections will depend not just on the growth of customers like OpenAI and Elon Musk’s xAI, but also its own ability to scale up its networks to serve those businesses. That won’t be easy, or cheap. In a report last month, Morgan Stanley’s debt analysts projected a “sizable uptick in new bonds" from the software giant. And that is even after an $18 billion bond sale last month that will only cover about one-quarter of the company’s cash needs through 2028, the analysts said.

Oracle has a long record to lean on. The company has survived previous tech boom and bust cycles, and typically emerged even stronger from them. But it has also never burned cash for four years straight. If AI fever cools, mere projections of red-hot growth from Oracle won’t be enough.

Write to Dan Gallagher at dan.gallagher@wsj.com