Oracle: Cautiously Upbeat on Earnings (NYSE:ORCL)

Oracle Corp. (NYSE:ORCL) is set to report Q1’25 earnings on September 9, 2024, with strong upside expectations for analysts and investors. Analysts revised their EPS forecast up 13 times and down 5 times in last 90 days.

Additionally, institutional investors were net buyers of ORCL shares, suggesting significant interest in the ERP-turned-hyperscaler as the firm continues to expand its global AI factory footprint.

Consensus estimates 6% growth for eq1’25, with an EPS estimate of $1.33/share. For eq1’25, I estimate Oracle will bring in revenue of $13.3 billion with adjusted EPS of $1.36/share, just above consensus estimates. Given the optimism on Wall Street and the recent post-earnings price action in the tech sector, I am cautiously bullish on eq1’25 earnings and will downgrade ORCL stock from STRONG. BUY at a BUY rating. As a result, I lower my price target from $194/share to $182/share at 16x eFY26 EV/aEBITDA.

My rationale behind the downgrade revolves around the broader bullish outlook for Oracle’s earnings performance. This leaves very little room for an earnings surprise and could result in either an earnings miss, as experienced in 4Q24, or minimal upside potential due to the tight dispersion between estimates and consensus results.

Unless Oracle’s Cloud Services segment beats analysts’ expectations, ORCL stock may follow the same fate as other tech companies after earnings.

You can review my previous coverage of Oracle Corp. here:

Oracle has a long development track for OCI

The Oracle Investment Thesis

I want to state that I remain bullish on Oracle’s long-term growth strategy as the firm expands its AI factory presence and brings AI capabilities to ERP software. The focus is more on the state of the market and the potential for valuations to moderate. ORCL stock currently trades at 15.84x EV/EBITDA, a premium to Google ( GOOG ) and Amazon ( AMZN ) and a discount to Microsoft ( MSFT ). Using an enterprise value-weighted valuation approach, ORCL stock appears undervalued relative to its peers, suggesting upside potential resulting from mean reversion. This factor makes me more bullish on ORCL stock as a strong investment candidate as Wall Street continues to undervalue the hyperscaler.

Operationally, Oracle is fast becoming one of the largest builders of artificial intelligence factories as the firm expands its presence across geographies to comply with local data privacy laws and engage in winning sovereign government business. Oracle is currently building 100 new data centers and expanding capacity at existing data center sites. One factor that was mentioned in their Q2’24 earnings call was that Oracle’s data centers are not scaled to meet current GPU demand, suggesting that the market remains underserved and requires this long track of AI factories which Oracle is positioning itself to meet. .

We have enough Nvidia GPUs for Elon Musk’s xAI company to bring the first version, the first available version of their big language model called Grok. They got it up and running. But boy, they wanted so much more. Boy, they wanted a lot more GPUs than we gave them. We gave them quite a few, but they wanted more and we are in the process of getting them more.

Larry Ellison, President and CTO, Oracle

This factor gives me reason to believe that the cloud services segment can grow to a $25 billion business in eFY25 and over $33 billion by eFY26.

The only impediment that seems to have been removed in the last two quarters is the availability of GPUs. Management at Nvidia ( NVDA ) reported that supply for Hopper GPUs has improved as demand for the new Blackwell platform outstrips supply. Advanced Micro Devices (AMD) has hinted at similar availability for their MI300 GPUs paired with their EPYC processors. Given the limited supply of GPUs, Oracle should be better positioned to accelerate its data center expansion program with improved availability for training models.

One factor that stands out about Oracle’s data center expansion is that all data centers are self-managed, derived from a modular design, and can scale. Each data center is also designed with all OCI features built in, allowing customers to use all Oracle software services regardless of location. In addition, enterprises seeking to use private data centers on-premises can implement OCI without incurring additional costs outside of consumption. This provides customers with a compelling investment strategy for developing their AI/ML models across all nodes.

Oracle Risks

The case of the bull

Oracle remains well positioned for growth as their data center strategy takes shape. Demand for GPUs in Oracle’s hosted data centers remains strong, with demand outstripping supply. This should result in strong growth for the company’s cloud services as the firm continues to build and expand its AI factories.

The case of the bear

The macroeconomic environment continues to darken as the business climate turns downward. August PMI readings provided mixed signals as employment slowed, paired with a sharp decline in backlogs in both services and manufacturing. This could pose a challenge for enterprises as they face a challenging growth environment and has the potential to trickle down into a decline in demand for Oracle’s cloud services.

Valuation and shareholder value

ORCL shares significantly outperformed the NASDAQ index ( QQQ ) and peer hyperscalers, outperforming the NASDAQ by 24% YTD.

Despite my bullish outlook for ORCL stock, I’m hesitant to buy earnings-driven stocks given the increased scrutiny investors and traders have placed on the tech industry this quarter. Despite near-term market volatility, I remain bullish on ORCL stock and bullish on the company’s operational performance.

Given the challenging market, I re-rate ORCL stock with a BUY recommendation and lower my price target from $194/share to $183/share at 16x eFY26 EV/aEBITDA.