Legacy Model Will Falter Amid Rising Compliance And Cloud Competition

Key Takeaways

• Reliance on legacy platforms and shifting customer preferences threaten core revenue streams, gross margins, and create heightened long-term volatility for future income.
  
• Intensifying competition and regulatory demands will increase compliance costs and further diminish Oracle's pricing power, scalability, and overall growth potential.
  
• Oracle is benefiting from strong demand for cloud and AI-driven solutions, expanding partnerships, and a full-stack strategy that supports sustained growth and long-term financial stability.

Catalysts

Offers products and services that address enterprise information technology environments worldwide.

• Oracle's dependency on proprietary database and software platforms faces a mounting threat from the continued industry shift toward open-source and cloud-native alternatives, which is set to erode its legacy revenue streams and undermine the high gross margins that have historically supported strong earnings.
  
• Frequent and rapidly evolving global data privacy regulations will require Oracle to incur sharply rising compliance costs, limiting the scalability of its core database and cloud businesses, and directly compressing net margins in the coming years.
  
• As enterprise buyers increasingly prefer flexible, pay-as-you-go cloud pricing over large upfront contracts, Oracle's traditional model for software and infrastructure subscriptions will lose predictability and stability, creating heightened revenue volatility and risk of revenue shortfalls.
  
• The ongoing migration by enterprises to SaaS-based, multi-cloud, and hybrid-cloud environments makes vendor switching easier, which will intensify churn and reduce the duration and value of Oracle's remaining performance obligations, cutting into future revenue growth and reducing the yield on current large RPO balances.
  
• Rapid innovation and scale among larger public cloud providers such as AWS, Microsoft Azure, and Google Cloud will accelerate competitive pressure, leading to commoditization of key Oracle offerings and impairing its pricing power, which endangers both topline revenue growth and sustainable increases in operating income.

Oracle Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Oracle compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Oracle's revenue will grow by 15.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 21.7% today to 23.9% in 3 years time.
• The bearish analysts expect earnings to reach $21.3 billion (and earnings per share of $7.49) by about August 2028, up from $12.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.0x on those 2028 earnings, down from 53.3x today. This future PE is lower than the current PE for the US Software industry at 35.0x.
• Analysts expect the number of shares outstanding to grow by 1.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.91%, as per the Simply Wall St company report.

Oracle Future Earnings Per Share Growth

Risks

• Strong long-term secular trends, such as accelerating digital transformation and the proliferation of artificial intelligence, are driving demand for cloud services, SaaS platforms, and robust database technologies, which is shown by Oracle's rapid cloud applications and infrastructure growth, supporting sustained expansion in revenue.
  
• The shift towards hybrid and multi-cloud environments plays directly to Oracle's strategy, as its databases can now run across all major public clouds (Azure, AWS, Google, and Oracle Cloud), enhancing stickiness and increasing Oracle's addressable market, which could further boost Oracle's revenue and market share.
  
• Oracle's growing backlog of noncancelable contracts and record-high remaining performance obligations, which reached 138 billion dollars (up 41% from the prior year), provide strong long-term visibility and predictability for future revenue, supporting shareholder value and financial stability.
  
• Expansion of Oracle's strategic partnerships, such as recent deals with Temu, TikTok, OpenAI, and others, as well as increasing adoption of Autonomous Database and integrated AI-augmented suites, positions Oracle as a differentiated, integrated platform provider, likely supporting higher topline growth, renewal rates, and net margins over the long term.
  
• The persistent growth in global IT spending on cloud infrastructure, high demand for AI workloads, and customers' desire for integrated, secure, and scalable technology stacks, combined with Oracle's full-stack approach (from infrastructure to SaaS), point to structural tailwinds that could sustain earnings and margin expansion well into the future.

Valuation

• The assumed bearish price target for Oracle is $175.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Oracle's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $325.0, and the most bearish reporting a price target of just $175.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $89.4 billion, earnings will come to $21.3 billion, and it would be trading on a PE ratio of 31.0x, assuming you use a discount rate of 8.9%.
• Given the current share price of $235.94, the bearish analyst price target of $175.0 is 34.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.