Oracle Corp (ORCL  ) has built a solid AI narrative, with its cloud business, government contracts and a role in the high-profile Stargate initiative.

But is all this enough to justify its steep valuation? Especially as the company heads towards reporting its third quarter earnings on Monday.

JPMorgan analyst Mark R. Murphy remains Neutral, acknowledging the potential for a spike in remaining performance obligations (RPO) but raising concerns about Oracle's heavy debt load and profitability metrics.

AI Bookings Boom - But Is It Sustainable?

Murphy highlights the likelihood of "outsized bookings performance" in the third quarter, with large AI-related deals expected. Oracle's participation in Stargate-a project with potential investments of up to $500 billion-adds to the optimism.

However, exact details remain unclear and Murphy warns that the company's valuation at ~46x EV/CY25E uFCF sets a high bar for earnings performance.

Murphy also takes aim at the prevailing bullish sentiment around DOGE-not the meme coin, but the Distributed Online Generative Engines (DOGE) model. Contrary to the late-2024 consensus that DOGE would provide an immediate revenue boost to software firms, Murphy has remained skeptical.

His contrarian stance appears validated, as the broad AI spending spree has not resulted in an across-the-board windfall.

Oracle's Debt, TikTok Uncertainty

Beyond AI, Murphy is also wary of Oracle's $89 billion debt burden, which equals nearly nine years of free cash flow. Additionally, TikTok remains a wildcard - Oracle is a key infrastructure partner, but ongoing U.S. regulatory concerns could impact the relationship.

While Oracle's AI ambitions are promising, Murphy notes that the company faces mounting expectations, tightening margins and significant financial obligations.

Investors banking on unlimited AI growth may need to reconsider the risks.