Oracle rises as AI-fueled backlog growth deflects spending worries

By Deborah Mary Sophia

Sept 11 (Reuters) - Oracle's shares gained 3% in early trading on Friday after a $26 billion jump in revenue backlog eased some concerns around its massive debt-driven spending spree, but analysts said the company's cash flow recovery is still a long way off.

Roughly half of the $664 billion in its backlog is expected to convert into sales within the next 36 months and much of its newly contracted revenue will not require its own capital, Oracle said, as it relies on client prepayments

and customers' own chip supply to build out capacity.

That, coupled with upbeat first-quarter earnings and an improving balance sheet, helped Oracle shares recover from a spell of underperformance.

The stock has fallen more than 21% this year through the last close, compared with a nearly 11% rise in the S&P 500 index, as investors questioned Oracle's costly AI bets and the viability of its traditional software business in the AI era.

"Despite Oracle asking customers to partially fund the technical hardware to alleviate its cash flow pressure, we do not foresee Oracle's cash flow profile changing anytime soon," Morningstar analyst Luke Yang said.

"It will take years before (cloud) revenue reaches a scale that supports continuous capacity expansion while generating positive cash flow at the same time."

Oracle carries risks around financing and data center profitability at a time when component costs have surged and broader backlash to data center development has grown in the U.S.

The company has said it will raise $40 billion through debt and equity financing in its current fiscal year, including the $20 billion stock sale it completed in the first quarter.

It reported negative free cash flow of $5.40 billion, better than analysts' estimate of a cash burn of $9.56 billion, according to data compiled by LSEG.

"(The) results were a solid step forward in balancing the investor discussion around a company delivering accelerating revenue growth, at scale. While the company's debt load is a valid concern, the positives in the business have gotten lost in the mix," Evercore analysts said.

The stock trades at 16.86 times its forward earnings estimates, compared with Microsoft's 23.84 multiple and Amazon's 22.58, according to data compiled by LSEG.

(Reporting by Kanchana Chakravarty in Bengaluru; Editing by Harikrishnan Nair and Pooja Desai)