Shares of Oracle, which reports earnings after the close, have plunged 33% since Sept. 10, when they hit an all-time high based on enthusiasm for raging growth in its cloud business. Today, Oracle and many other artificial intelligence companies are facing a wave of skepticism due to heavy capital expenditures and the circular nature of some arrangements.

“They are stretching their balance sheet about as far as they can, their free cash flow is negative and their balance sheet is highly levered,” said Jed Ellerbroek, portfolio manager at Argent Capital Management, which owns Oracle shares. “Their neck is sticking out.”

Oracle’s debt risk is particularly troubling to investors. The company has sold tens of billions of dollars of bonds in recent months through note sales in its name and indirectly through projects it’s backing. Last week, the cost of protecting Oracle’s debt against default reached its highest level since March 2009. Analysts following the company say this uncertainty dwarfs whatever good news it reports in its quarterly earnings.  

“It won’t matter as much as the overarching story of customer concentration, how are they financing all this?” Gabelli Funds analyst Ryuta Makino said. “They’re going to be free cash flow negative for the next couple of years during the data center build out. So there’s a lot of question marks surrounding that.”

Oracle declined to comment. Shares were little changed after falling 1.2% in early trading Wednesday.

Wall Street expects the Austin-based company’s backlog to grow in its fiscal second quarter, which ended in November. Remaining performance obligations, the figure that sparked the late-September rally, are projected to be about $520 billion, a more than 400% jump from a year earlier, and keep rising in the following quarter, according to data compiled by Bloomberg. 

Perception Problem

“It’s not about the growth rate as much as it is the perception of how they’re getting there,” said Michael Sansoterra, chief investment officer at Silvant Capital Management, which owns Oracle in its portfolios. “I don’t know that earnings will change the picture. I suspect the quarter will be good, and I suspect the guidance will be good.” 

Analysts estimate that Oracle will post an 11% jump in adjusted earnings per share from the same quarter a year ago on a 15% rise in revenue, according to data compiled by Bloomberg. The company’s gross margin is expected to be nearly 69%, down from 71% a year earlier. The big change is seen in its capital expenditures, which are projected to be $8.2 billion compared with less than $4 billion a year ago, and its free cash flow, which is estimated at negative $5.9 billion, up from $2.7 billion a year earlier.

On the earnings call, Oracle executives will almost certainly get questions about OpenAI, which signed a massive deal with Oracle for cloud-computing services in September. Investors are keen on diversity of Oracle’s expected revenue sources and any significant new customers signed during the quarter will likely be cheered. 

“I always thought it was dangerous for the company to take on significant leverage while tying its future to a startup. Now that OpenAI is under siege, the risk has elevated even further,” said Michael O’Rourke, chief market strategist at Jonestrading. “It will be imperative for management to present a contingency plan if OpenAI is slow or unable to execute.”

Regardless of how the results come in, options traders are expecting Oracle’s stock to move on the report, pricing in a 10% bounce in either direction following its earnings. The stock has been rebounding recently and is up almost 10% in December. 

In terms of valuation, the shares are relatively expensive, trading at roughly 30 times estimated earnings over the next 12 months, far higher than their 10-year average of 17 and above the Nasdaq 100 Index’s 26 multiple. 

All of which has some investors hesitant about buying Oracle right now. Sansoterra at Silvant Capital, for one, says he’s in a holding pattern. 

“If we saw margin improvement or margin trajectory that was not just talk but actual execution, we’d be more interested,” he said. “But we haven’t seen that yet. And we don’t do the hope trade.” 

Cisco Systems Inc. shares have rallied about 34% this year as the stock inches closer to its all-time high set in 2000. Investors have waited more than 25 years for this moment, with the stock trading at levels last seen during the peak of the dot-com era.