The calm before the earnings season storm. Big Banks tend to suck up all of the hype and late-night popcorn-fueled stock zooming buzz in March and April each year, but Oracle and Adobe opened earnings Wednesday — so let the software disruption showdown begin.

Aside from geopolitical noise and insanely fast-moving oil prices (+20% from mid-Feb to yesterday), investors are going to be laser-focused on earnings results and commentary around how companies are building out infrastructure around AI.

We all know AI infrastructure buildout is happening, sure. The question is will the “earn now, spend later” mentality of Big Tech destroy actual earnings down the line?

Oracle Growth Eats Itself

Oracle reported earnings late Tuesday, excellent numbers. Earnings per share of $1.79 on $17.2 billion in revenue crushed the $1.70 street consensus estimate. But this wasn’t your typical “beat the street” earnings beat story. Oracle posted their strongest quarterly growth in 15 years.

There’s a line item everyone should be looking at, however. Their quarterly Capital Expenditure (CapEx). Oracle is on pace to announce $50 billion in CapEx this year alone. Sure, other mega-cap, “Magnificent” tech companies with ludicrous amounts of cash flow will continue to fuel growth through internal cash generation, but Oracle is going the old-school route of bulking up via debt.

Oracle raised $30 billion via the bond and convertible markets just last month to fund growth.

• Bulls will tout Oracle’s Remaining Performance Obligations (RPO), up 325% to $553 billion due to their truly massive capacity commitment with OpenAI.
• Skeptics will point out how Oracle is essentially acting as landlord to every scrappy tech startup out there striving on their sundry AI products. Oracle is proudly announcing how much mortgage debt it can accrue on AI-specialized real estate.

Adobe Is Still Fighting GenAI-Induced Paranoia 

Adobe had a similarly underwhelming report on Wednesday. They reported earnings of $6.06 per share (Non-GAAP) on $6.4 billion in revenue, which was also a beat. However, the bulls bought right into the small gap… Only to get ridiculed and crushed by shorts all day.

GenAI-paranoia is still weighing down Adobe investors. Ask: Does AI mean the death of Photoshop? Imagine you work for some corporation’s marketing team. You don’t need Photoshop to design a billboard, because an AI bot magically wrote the world’s greatest billboard campaign from a text prompt. Why pay a yearly subscription to Adobe when the bots are creating enire advertising campaigns for you? (Adobe doesn’t break out AI revenue specifically, but AI-first product monetization tripled YoY this quarter.)

Enter the Disruption Paradox: Adobe is trading its forward earnings multiple at a 47% discount to the S&P 500’s median forward multiple over the past 5 years, despite AI and content disruption missing entirely from Adobe’s quarterly financials.

Hyper-growth investors are going to experience cognitive dissonance this earnings season. The buzzword theme we see come out of earnings will be decoupling software infrastruction (companies selling the shovel) vs software applications (people buying the shovel to go “shovel gold”). 

Infrastructure companies like Oracle are getting a free pass for now, but borrowing billions in CapEx is eventually going to eat away at margins. Application companies like Adobe are proving naysayers wrong about AI — but it can only fight off so many shareholders thinking “AI is going to replace everyone.”

What both companies say about AI/GenAI fueled growth moving forward will be key this earnings season. Bulls love AI sales translating to recurring revenue — but if Oracle and Adobe can’t prove AI is adding to the bottom line without completely cannibalizing current revenue streams, we’ll look back at that 20.9 forward P/E as a piñata full of bricks.