Oracle Corporation (NYSE: ORCL) is capitalising on the accelerating shift towards multi-cloud architectures and the burgeoning demand for AI-optimised infrastructure. While near-term execution risks persist, Oracle’s strategic positioning, coupled with a substantial $30 billion cloud deal, presents a compelling long-term investment opportunity. This report argues that current valuations underestimate Oracle’s potential, driven by secular tailwinds in enterprise cloud adoption and the transformative power of artificial intelligence.
Executive Summary
Oracle’s transition to a cloud-first enterprise is gaining significant traction, evidenced by robust cloud revenue growth of 27% year-over-year and an even more impressive 52% surge in Oracle Cloud Infrastructure (OCI) revenue in Q4 FY253. The company’s multi-cloud strategy, allowing seamless integration with competitors like AWS and Azure, addresses a critical need for enterprises seeking flexibility and avoiding vendor lock-in. Furthermore, Oracle’s aggressive investments in AI infrastructure, including strategic partnerships with Nvidia, position the company to capture a significant share of the rapidly expanding generative AI market. While competitive pressures from hyperscale cloud providers remain a key risk, Oracle’s entrenched customer base, robust product portfolio, and expanding cloud offerings create a compelling investment thesis.
Industry Overview
The global cloud services market, estimated at $1.6 trillion by 2025 (Gartner), presents a vast opportunity for Oracle. Within this market, Oracle is focused on the $400 billion database segment and the $500 billion infrastructure segment. The industry is characterised by intense competition, with Amazon Web Services (AWS) and Microsoft Azure holding a dominant position. However, the growing trend towards multi-cloud adoption, with 70% of enterprises utilising two or more cloud providers, creates a favourable environment for Oracle’s interoperable cloud solutions.
Company Analysis
Oracle operates across three primary segments: Cloud Services & License Support (77% of FY25 revenue), Cloud License & On-Premise (9%), and Hardware & Services (14%)13. The company boasts a diverse customer base of over 430,000 global enterprises, spanning various sectors including finance, healthcare, and retail. Oracle holds a 20% share in the enterprise database market and a 6% share in the cloud infrastructure market. Key strengths include its leading database technology, a growing cloud business, and a substantial recurring revenue base. Weaknesses include its later entry into the cloud market compared to established players and potential margin pressure from ongoing investments in OCI.
Investment Thesis
Oracle’s multi-cloud strategy, coupled with its leadership in database technology and growing AI infrastructure capabilities, positions the company for sustained growth. The landmark $30 billion cloud deal and a robust Remaining Performance Obligation (RPO) growth of 41% underscore the increasing enterprise demand for Oracle’s solutions1. While competition remains fierce, Oracle’s differentiated offerings and focus on enterprise-grade solutions create a compelling value proposition. We believe that the current valuation underestimates the company’s long-term growth potential driven by these secular tailwinds.
Valuation & Forecasts
We employ a discounted cash flow (DCF) model to value Oracle, incorporating a weighted average cost of capital (WACC) of 8% and a terminal growth rate of 4%. Our base case scenario, with a 70% probability, projects FY26 revenue at $66 billion (+15% YoY) and FY28 revenue at $90 billion, driven primarily by cloud growth. This results in a target price of $260 per share.
| Scenario | Probability | FY26 Revenue | FY28 Revenue | Target Price |
|---|---|---|---|---|
| Base Case | 70% | $66B | $90B | $260 |
| Bull Case | 20% | $70B | $100B | $320 |
| Bear Case | 10% | $60B | $75B | $180 |
A comparative analysis using EV/EBITDA and P/E multiples against peers like Microsoft (MSFT) and Salesforce (CRM) suggests that Oracle’s valuation is relatively attractive, even with its recent stock price appreciation.
Risks
Key risks include execution risks related to the $30 billion cloud deal, potential margin pressure from OCI expansion costs, intensifying competition from hyperscale cloud providers, potential supply chain disruptions affecting AI chip availability, and regulatory scrutiny related to cloud and data privacy. In a bear case scenario, where OCI growth is capped at 30% due to competitive pressures, FY28 revenue could be $10 billion lower than projected, potentially leading to a stock price decline to $180.
Recommendation
We maintain a Buy rating on Oracle Corporation with a 12-month price target of $260, representing a 20% upside from the current price. Oracle’s strategic focus on multi-cloud architecture, coupled with its burgeoning AI infrastructure business, positions the company to benefit from secular growth trends. Despite near-term risks, the long-term growth potential outweighs the potential downside. Key monitoring pillars include OCI growth trajectory, progress on the $30 billion cloud deal, and competitive dynamics in the cloud market.
