Oracle is set to capitalize on 13.1938% revenue growth driven by cloud and AI expansion

Key Takeaways

• Strategic investments in cloud services and collaborations are likely to drive revenue growth and expand Oracle's customer base.
• Oracle's advancements in AI infrastructure and efficient cloud scaling are expected to enhance earnings and improve margins.
• Oracle faces execution risks with large capital expenditures, currency fluctuations, and increased competition potentially impacting revenue, margins, and cash flow in cloud and AI segments.
• Tolls?

Catalysts

About Oracle

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

What are the underlying business or industry changes driving this perspective?

• The rapid growth in cloud services, especially Oracle Cloud Infrastructure (OCI), is expected to continue driving total revenue as demand for AI workloads and cloud flexibility increases. This should significantly impact future revenue growth.
• Oracle's multi-cloud strategy and collaborations with Microsoft, Google, and AWS are likely to broaden its customer base and enhance database migration to the cloud, further boosting cloud revenue and potentially increasing net margins.
• The strategic expansion of SaaS applications and industry-specific cloud applications are poised to contribute to increased revenue, as seen in the strong growth of back-office systems, reflecting higher demand and revenue potential in the SaaS sector.
• The investment in AI infrastructure, including Oracle’s leading position in AI supercomputing and unique database capabilities, positions Oracle to benefit from the AI revolution, potentially enhancing earnings through innovation and increased market share.
• Oracle's capacity to scale cloud regions efficiently allows for a more aligned capital expenditure with revenue growth, likely improving operating margins and free cash flow as cloud infrastructure expands and demand continues to rise.

Oracle Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Oracle's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.2% today to 23.6% in 3 years time.
• Analysts expect earnings to reach $18.9 billion (and earnings per share of $6.6) by about March 2028, up from $11.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $15.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.2x on those 2028 earnings, up from 37.3x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 1.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Oracle Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

• Oracle faces significant execution risk associated with its large capital expenditures, which are expected to double this fiscal year, potentially affecting free cash flow if the anticipated revenue growth does not materialize.
• Currency fluctuations, such as the strengthening of the U.S. dollar, pose a risk to Oracle's revenue and EPS growth, with potential negative impacts on revenue by 2% in the upcoming quarter.
• Although there is strong growth in the AI and cloud segments, the transition from on-premise databases to the cloud is still in its early stages, which could delay expected revenue if customer adoption is slower than predicted.
• Increased competition in the cloud space, especially from major players like AWS, Google, and Azure, could pressure Oracle's pricing and market share, potentially impacting revenue and margins.
• High dependency on continued AI cluster expansion and networking advancements pose a risk; any failure to maintain infrastructure performance could affect competitive advantage and revenue growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $194.817 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 $227.0, and the most bearish reporting a price target of just $130.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $80.3 billion, earnings will come to $18.9 billion, and it would be trading on a PE ratio of 38.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of $155.16, the analyst price target of $194.82 is 20.4% higher.
• 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.