Cloud Expansion And Calculated Partnerships Fuel Optimism For Robust Growth

Key Takeaways

• Oracle's increasing cloud service adoption and data center expansion indicate potential for revenue growth and improved infrastructure capacity.
  
• Strategic partnerships and a focus on high-margin cloud services suggest a stronger competitive position and potential for higher earnings.
  
• Oracle's expansion in cloud infrastructure faces challenges from intensifying competition, operational and financial risks, and potential impacts on margins and customer trust.

Catalysts

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

• Increasing adoption of Oracle's cloud services, particularly Oracle Cloud Infrastructure (OCI) and autonomous database, suggests notable revenue growth potential, especially as businesses transition more workloads to the cloud. This transition will likely result in higher recurring revenue from cloud services.
  
• Expansion of Oracle's data center footprint, with plans to double CapEx in fiscal 2025 compared to 2024, indicates a commitment to supporting the increasing demand for cloud services, potentially boosting infrastructure revenue as capacity constraints are eased.
  
• Oracle's strategic partnerships with major cloud providers like Amazon Web Services, Microsoft Azure, and Google Cloud, to offer Oracle Database on their platforms, can significantly widen Oracle's market reach and strengthen its competitive position, possibly leading to higher database subscription revenues.
  
• The shift towards more automated and efficient operations, as highlighted by the commitment to operating expense discipline and the use of automation and AI in cloud services, suggests potential for improved operating margins over time.
  
• Oracle's focus on high-margin cloud services, such as SaaS (Software as a Service) and the autonomous database, alongside the optimization of operating expenses, indicates a strategic direction that might lead to enhanced net margins and earnings growth.

Assumptions

• Analysts are assuming Oracle's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.4% today to 25.6% in 3 years time.
• Analysts expect earnings to reach $19.5 billion (and earnings per share of $6.74) by about November 2027, up from $11.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $16.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.7x on those 2027 earnings, down from 47.9x today. This future PE is lower than the current PE for the US Software industry at 41.2x.
• Analysts expect the number of shares outstanding to grow by 1.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Risks

• Increasing competition, particularly in the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) markets, could pressure Oracle's cloud margins and revenue growth.
  
• Heavy investments in cloud data centers and infrastructure to support expanding Oracle Cloud Infrastructure (OCI) may strain operating margins if the anticipated demand growth does not materialize.
  
• The rapid scaling of the OCI and potential logistical and operational challenges associated with managing a vast number of global data centers might impact operational efficiency and increase costs.
  
• Reliance on automation and advanced technologies for cloud data center management and customer service poses the risk of technical glitches or cybersecurity vulnerabilities, potentially affecting customer trust and service reliability.
  
• Fluctuations in currency exchange rates could impact Oracle's reported revenue and earnings in U.S. dollars, posing a financial risk despite the company's attempts to hedge against such fluctuations.

Valuation

• The analysts have a consensus price target of $178.77 for Oracle based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $214.0, and the most bearish reporting a price target of just $108.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $76.3 billion, earnings will come to $19.5 billion, and it would be trading on a PE ratio of 32.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $189.58, the analyst's price target of $178.77 is 6.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.