Oracle Corporation - Is the hype justified, or is it time to take profits? [Stock Analysis]

After 60%+ gains YTD, it is time to take some profits or do Oracle shares remain attractively priced amid improving fundamentals and growth expectations.

Oracle shares have absolutely skyrocketed in recent months, with shares gaining over 20% in the span of a few weeks thanks to blowout quarterly results, an optimistic analyst meeting, and the effect of the AI boom really starting to show in Oracle’s financial results while Wall Street continues to underestimate its cloud potential, strength, and unique positioning.

I first pointed to Oracle’s strong cloud foundation and approach as early as March 2023. Since then, Oracle has proved to be a strong competitor in the cloud industry with a differentiated approach. As a result, it has massively grown its cloud business, outpacing its larger peers in Google, Microsoft, and Amazon and signing massive contracts with industry leaders.

Since my initial post on Seeking Alpha in March 2023, Oracle has delivered 2x the return of the S&P500, returning 95% to investors. (Patting yourself on the back a bit is okay, right?)

Anyway, today, I continue to view Oracle as one of the most compelling and underrated AI plays. With its differentiated approach, I believe Oracle is extremely well-positioned for long-term success.

Meanwhile, Oracle’s financials keep improving as growth accelerates and margins expand rapidly as significant cloud infrastructure investments are fully paying off today. The company continues to see explosive demand for its infrastructure business, as highlighted by insane growth in RPO or new massive deals being signed, including with customers like OpenAI, xAI, and Nvidia itself.

Moreover, cementing investor enthusiasm, thanks to this massive cloud success, Oracle raised its medium-term outlook during its Analyst Meeting and issued very bullish long-term guidance, pointing to double-digit top-line growth through the end of the decade and EPS growth of closer to a 20% CAGR, which is absolutely brilliant for a $450 billion industry stalwart that had grown its top line at a CAGR of closer to 2% over the last decade after spending over $100 billion on a number of failed M&A attempts.

This company has truly made a massive turnaround. As I wrote before, “Oracle is a global technology company with an impressive suite of enterprise software products, database software, and an incredible cloud infrastructure. With its headquarters in Redwood City, California, Oracle has expanded its reach worldwide, boasting a presence in over 175 countries and over 340,000 customers.

Oracle remains the undisputed leader in relational databases and one of the leading providers of enterprise software solutions, including customer relationship management (CRM), enterprise resource planning (ERP), human capital management (HCM), and supply chain management (SCM) software.

Meanwhile, it holds a 2% market share in the cloud industry, and while this might not sound impressive, it makes it the 7th largest cloud vendor globally and one of the fastest-growing!”

However, despite my enthusiasm for Oracle, its prospects, and its favorable cloud approach, shares have become much more expensive after a 60% YTD gain. Whereas shares traded at 22x fiscal FY25 earnings back in June, the recent rally has brought this up to a 27x(!) multiple today, which stands in sharp contrast to its 5-year average of closer to 17x.

So, what does this mean for potential/interested investors and shareholders? Is it time to take some profits, or is there more room to run?

Let’s find out by taking a closer look at Oracle’s cloud and AI edge, recent financial results, and its prospects.

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Oracle is turning into a real (and unique) cloud force

I have said it before, and I’ll say it again: While Oracle might not be the cloud industry leader in terms of size and revenue (only a 2% overall market share versus the mid-20s and low-30s for Microsoft and AWS, respectively), the company is uniquely positioned within the industry thanks to its focus on multi-cloud offerings, and has a significant edge when it comes to AI and LLM training, allowing it to outgrow its larger peers and resulting in a compelling growth outlook.

In fact, I believe that today, Oracle has one of the most compelling cloud offerings as a result. And with this industry still expected to grow at a high-teens to low-twenties CAGR through the end of the decade, this is a more than great position to be in.

Setting it apart from the competition the most is its commitment to the multi-cloud strategy. Instead of competing with the likes of Microsoft, Google, and Amazon, Oracle wants to leverage these massive players' reach and infrastructure to expand its reach and the availability of its AI and enterprise software features, such as its ERP suites and widely used database software.

Expanding on this a bit more, traditionally, cloud providers aimed to lock customers into their ecosystems, offering all services under one roof. This makes sense as it maximizes the revenue opportunity, future revenue predictability, and a company’s moat.

However, as the demand for flexibility and interoperability across different cloud platforms grows, Oracle's multi-cloud strategy seeks to meet this need by enabling customers to integrate and manage workloads across multiple cloud providers, which is becoming the preferred approach, especially among larger enterprises. This is what CTO Ellison said back in 2023:

“Our job is to give our customers the ability to choose application and infrastructure technology from multiple cloud providers and then have those different clouds coexist and interoperate. Multi-cloud interoperability is an important step in the evolution of cloud computing.”

Meanwhile, this approach allows Oracle to position itself as a more versatile and open platform, appealing to enterprises that prefer not to be tied to a single cloud vendor. By offering services that work seamlessly with other cloud providers like AWS, Microsoft Azure, and Google Cloud, Oracle ensures its technologies are accessible to customers who may have existing investments in these platforms.

This way, Oracle is actually maximizing the revenue opportunity even more as it also ensures that existing enterprise software customers can continue using Oracle even if they opt to go with Microsoft Azure or AWS for their cloud infrastructure while also growing its overall reach and potential customer base.

Furthermore, it also poses itself as a flexible and appealing option in the cloud industry, particularly for these larger enterprises. Instead of relying on a single cloud provider, a multi-cloud strategy allows an organization to leverage the strengths and capabilities of multiple providers while also mitigating the risks associated with relying on a single provider.

Considering all of this, I can see why Oracle chose this strategy, and clearly, it is working for it. It has signed massive cloud deals in recent quarters, highlighted by 52% RPO growth.

In addition to these large customer deals, Oracle is also still expanding its partnerships with cloud computing leaders. In the latest quarter, it added an AWS partnership, meaning Oracle’s cloud stack is now available on each of the top three cloud computing platforms.

This is what management said during the earnings call:

“With today's AWS announcement, our customers will be able to use Oracle's latest Exadata and Exascale RDMA clusters with the latest versions of our database software from within the Microsoft Azure cloud, from within the Google Cloud, and from within the AWS cloud. This will enable customers to use the Oracle database anywhere and everywhere.”

In part thanks to these partnerships, Oracle today is one of the best available cloud stacks out there, with massive global reach. In terms of global infrastructure, as of last quarter, it has 162 cloud data centers, live and under construction throughout the world. In 2024, data center capacity more than doubled. Whether you focus on usage, computing capacity, or new deals, Oracle’s OCI infrastructure is the fastest growing out there, showing no signs of slowing down.

However, there is even more to like here and what sets Oracle apart from the competition, apart from its multi-cloud approach. First of all, there is security. Security has been Oracle's primary focus since the start of its cloud offering, and with features like virtual machine isolation and advanced threat detection, Oracle’s cloud stack is one of the most secure out there.

Also, thanks to its unique setup, both technologically and price-wise, Oracle’s OCI is ideally suited for running AI models and large LLMs. The company’s close relationship with Nvidia helps with this. I mean, the fact that Oracle is the preferred cloud vendor for Nvidia itself says a lot.

This is what was said during the latest earnings call:

“Building giant data centers with ultra-high apartments RDMA networks and huge 32,000 node NVIDIA GPU clusters is something that Oracle has proven to be very good at. It's the reason we're doing so well in the AI training business.”

Notably, its unique technological setup, without getting too much into the technical details, allows its customers to run LLMs several times faster and, therefore, also at a fraction of the price of its competitors.

In fact, Oracle is several times cheaper on an on-demand pay-go basis, which is most often used for AI training. Compared to any of the three leaders, Oracle is more than 100% cheaper. Extremely favorable pricing, indeed, which has made it a favored pick among startups as well.

Ultimately, I believe we can safely conclude that Oracle's cloud operations are firing on all cylinders, positioning itself uniquely. As a result, Oracle has become one of the most compelling cloud infrastructures out there and surely the fastest growing. In recent quarters, massive new deals have translated into 50%+ RPO growth, allowing management to guide for cloud infrastructure revenue growth accelerating further in fiscal FY25, even as it laps last fiscal year’s 51% YoY growth.

This is absolutely staggering and plenty of reason for recent enthusiasm around Oracle. The company is turning into a real cloud force, and with it well positioned toward the AI boom, growth is only expected to accelerate.

Do not underestimate this company’s cloud computing potential. There is a lot to like here!

On that note, let’s review the recent financials to get a better sense of the financial performance.

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Oracle is firing on all cylinders thanks to its cloud business

Oracle announced its latest financial results in early September and didn’t disappoint. Both revenue and EPS came in at the high end of management’s guided range and topped the analyst consensus, with revenue topping by 0.5% and EPS by 4.5%.

Oracle reported a total revenue of $13.3 billion for the quarter, up 8% YoY, showing a predicted growth acceleration from prior quarters. From mid-single digits in recent years, growth is now accelerating further into the high single digits, as visualized below, and is expected to further accelerate into the double digits later this fiscal year. It is great to see management’s expectations materialize here.

(Note that high growth in 2023 was the result of the Cerner acquisition)

Unsurprisingly, Oracle's cloud operations drive a big part of this new growth leg, which continues to perform tremendously well. Total cloud revenue in its fiscal Q1 was up 22% YoY to $5.6 billion, which is comprised of solid growth in its cloud applications and the absolutely staggering growth of its OCI cloud infrastructure business.

IaaS or infrastructure growth came in at a whopping 46% YoY to $2.2 billion, even though Oracle lapped its 64% growth from last year. Most notably, this reflects an acceleration in infrastructure revenue growth for the first time in 5 quarters. Oracle is getting new capacity online and remains capacity-restricted, resulting in a 56% growth in OCI consumption revenue.

Furthermore, its infrastructure cloud services now have an annualized revenue of $8.6 billion. With much more capacity coming later this year, there is a lot more good to come on this front, with growth most likely accelerating further.

Meanwhile, the SaaS part of Oracle’s cloud business also continues to grow nicely thanks to the continued migration to the cloud by Oracle customers and solid adoption overall. As a result, SaaS revenue was up 10% to $3.5 billion, and back-office SaaS applications are now sitting at annualized, mostly recurring, revenues of $8.2 billion, up 18% YoY.

However, the real highlight last quarter once again was Oracle’s reported RPO or Remaining Performance Obligations, which refers to obligations under its contracts with customers to transfer goods or services that have not yet been fulfilled as of the reporting date. In other words, this is revenue to be realized at a later date under signed contracts, and the rapid growth Oracle is seeing here indicates massive demand, large contracts being signed, and growth bound to accelerate.

Last quarter, RPO grew to $99 billion, up 52% YoY after 44% growth last quarter. This shows massive demand for Oracle’s services and long-term contracts being signed. Even though Q1 generally sees a seasonal decline in RPO, we actually saw a sequential increase of $1 billion this time out, which illustrates Oracle’s current success.

Again, unsurprisingly, cloud demand was the driver of this, with cloud RPO up over 80% YoY and now representing close to 75% of total RPO. In management’s words, this reflects “the growing trend of customers wanting the larger and longer contracts as they see firsthand how Oracle Cloud services are benefiting their businesses.”

Moving to the bottom line, Oracle is once more reaping the rewards of its cloud success. Prior infrastructure investment is now materializing, and top-line growth is starting to outpace cost growth thanks to a lot of cloud capacity coming online.

As a result, Oracle reported gross profit growth of 9% YoY and operating income growth of 14% thanks to roughly 200 bps of margin expansion to 43%. Q1 is generally a seasonal low, but the graph below still clearly reflects a solid uptrend in margins, one that is expected to persist.

Thanks to these expanding margins, EPS grew 18% YoY in Q1, coming in at $1.39, with the profit margin up 280 BPS YoY.

Further down the line, Oracle reported an FCF of $5.1 billion, which is, in fact, down from the $5.7 billion reported last year due to significant Capex investments. Last quarter alone, Oracle spent $2.3 billion in Capex, mostly in order to grow its cloud capacity. Positively, these investments should pay off nicely in the longer term.

For reference, Oracle’s ROCE has been in the low-teens range in recent years, getting closer to 15% in the most recent quarter (WACC of 10.5%)

Meanwhile, Oracle is also still able to strengthen its balance sheet, which remains a bit of a tricky subject. You see, net debt hit a high of $76.6 billion in 2023 after the Cerner acquisition, which is quite significant, even for a business generating $10+ billion in annual FCF.

Positively, Oracle has since been aggressively trying to bring this down, besides investing in its cloud business, and successfully so, bringing it down to $64.7 billion as of the most recent quarter.

Of course, these still aren’t quite the preferred levels, but I am confident Oracle will be able to bring this down to healthier levels in the years ahead, in part thanks to improving margins and cash flows as cloud investments continue to pay off. As a result, I am not overly concerned (it has BBB credit rating from S&P).

Finally, besides investing in its cloud infrastructure and improving its balance sheet, Oracle also still pays a respectable dividend, although the yield has been trending down in recent quarters due to the rising share price.

Currently, Oracle pays a yield of just below 1%, which isn’t bad for a growth business, which it has once more become. Also, with a payout ratio of 28%, the dividend seems well-covered and healthy—the current $4.4 billion in annual dividend obligations is easily covered by $11+ billion in FCF.

Investors also get a nicely growing dividend. Over the last five years, Oracle has grown the dividend at a 13% CAGR, and while I do expect this to slow down a bit, high single-digit growth remains highly likely, a nice extra on top of the strong expected revenue and EPS growth.

Ultimately, Oracle's growth and financial health are looking good, and there is plenty of reason for optimism.

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Outlook & Valuation

Regarding forward expectations and growth potential, there is clearly a lot to like here. Everything points to a growth acceleration across the board.

Starting with the near-term projections, management now expects to report a further growth acceleration in Q2, pointing to 8-10% growth in USD, helped by total cloud revenue growth of 24-26%. Furthermore, EPS is expected to come in between $1.45 and $1.49, up 8-12%.

Meanwhile, on an FY basis, management remains very confident, pointing to double-digit top-line growth and cloud infrastructure revenue growth exceeding last year’s growth. And even though management expects Capex to double as well this fiscal year, margins should expand YoY.

Ultimately, this is very appealing near-term guidance, and it already explains some of the investor enthusiasm in recent weeks.

However, on top of this, Oracle management, during its Analyst Meeting, upgraded its 2026 revenue outlook to $66 billion from a previous $65 billion and revealed 2029 revenue guidance of $104 billion, pointing to revenue growing at a CAGR of over 14% through the end of the decade, which is extremely bullish and promising.

Clearly, Oracle management expects its cloud revenues will continue to grow rapidly, and I can see why!

Meanwhile, profit margins are expected to expand further as well, thanks to cloud revenue growth outpacing cost growth. Oracle has made many investments in recent years that are now starting to pay off. As a result, EPS growth in excess of 20% isn’t out of the question, with the operating margin potentially exceeding 50% in the years ahead.

In the end, even though I was bullish way before Wall Street noticed the cloud potential for Oracle, my previous projections turned out to be way too low, as my expectation for low-teens growth in the years ahead is simply too conservative.

Based on recent cloud developments and management’s commentary, I have upped my revenue and EPS estimates, now expecting much more impressive top and bottom-line growth. You can find my projections below.

However, despite revenue and EPS projections improving considarably, the Oracle share price has risen far more significantly. As a result, shares are now trading at 27x earnings, compared to a 22x multiple back in June.

And whatever way you look at it, a 27x multiple is quite heavy for Oracle, even as the narrative has improved significantly. Taking into account its significant net debt, which better illustrates the actual value of the business, an EV/E (Enterprise Value/Earnings) multiple of 30x is hard to overcome and not that far from the 32x multiple Microsoft trades on, which remains a far superior business in my eyes.

Based on this, shares look straight-up expensive today. Of course, we do need to properly factor in Oracle’s growth ahead, and a PEG of 1.8x indeed shows that based on forward growth expectations, shares don’t look too expensive. This is in line with its 5-year average and a minor discount to the sector.

So, what is it now? Are shares overvalued or fairly valued?

The truth is probably somewhere in the middle for me, but the most important takeaway is that shares aren’t as appealing as they have been for most of the last two years, and while this in itself isn’t a problem with an improving underlying thesis, shares look very heated after the YTD run-up in share price.

Therefore, I remain on the sidelines for now. While I am a massive Oracle bull and a strong believer in Oracle’s approach to the cloud industry, I am not willing to pay the current premium.

Yes, Oracle will be a tremendous long-term investment, but picking up shares at more compelling multiples will meaningfully improve your long-term returns. Personally, I am aiming for a share price dip below $155 before potentially picking up some shares. If we get below $150, it’s time to start accumulating.

• End of fiscal FY27 target price = $205

• Potential annual returns from the current price of $170 (CAGR) = 7% (8% inc. dividends)

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  Disclosure: I/we may or may not have a beneficial long position in any of the securities discussed in this post, either through stock ownership, options, or other derivatives. This article expresses our own opinions, and we are not receiving any sort of compensation for it.

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