Shaping The Future, A Soaring Journey In Cloud Innovation And Strategic Growth

Key Takeaways

• Oracle's shift to cloud-based revenue signals significant future revenue growth, moving from one-time license fees to ongoing cloud commitments.
  
• Major contract signings and strategic multi-cloud partnerships underline growing demand for Oracle's cloud services, promising expanded market reach and improved net margins.
  
• Aggressive cloud expansion and exiting the advertising business may strain finances and impact revenue, with supply constraints and exchange rate risks also being significant.

Catalysts

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

• Oracle's pivot to a cloud-focused model, demonstrated by a record $98 billion in remaining performance obligations (RPO), suggests a strong roadmap for revenue growth from cloud services, highlighting a move away from one-time license revenues to multiyear cloud commitments. This shift is expected to accelerate revenue growth rates significantly.
  
• The successful signing of large contracts, including the largest sales contract in Oracle's history and over 30 AI contracts totaling nearly $17 billion this year, indicates growing demand for Oracle's cloud offerings. These agreements are likely to bolster both revenue and net margins through increased utilization of Oracle's cloud infrastructure and applications.
  
• Oracle's strategic expansions, such as the multi-cloud partnerships with companies like Google, showcase the company's capacity to attract and retain major technology clients. These partnerships are expected to enhance Oracle's cloud services' reach and interoperability, contributing to revenue growth and expanding the customer base.
  
• The significant investment in cloud infrastructure, with plans to double CapEx in fiscal year '25 compared to '24, reflects Oracle's aggressive approach to scaling its cloud capacity. This investment is likely to support Oracle's accelerating cloud infrastructure services growth, which in turn could positively affect IaaS revenue growth and improve gross margins over time.
  
• Oracle's unique offering of various deployment models (public cloud, sovereign clouds, dedicated cloud, etc.) and its Oracle Alloy initiative, enabling partners to offer customized cloud services, present significant growth opportunities. These factors are expected to impact Oracle's ability to cater to diverse customer needs, driving broader adoption of its cloud services and contributing to ongoing revenue and margin expansion.

Assumptions

• Analysts are assuming Oracle's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.8% today to 27.3% in 3 years time.
• Analysts expect earnings to reach $19.6 billion (and earnings per share of $6.93) by about July 2027, up from $10.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $20.8 billion in earnings, and the most bearish expecting $17.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.2x on those 2027 earnings, down from 37.5x today. This future PE is lower than the current PE for the US Software industry at 40.2x.
• Analysts expect the number of shares outstanding to grow by 1.53% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Risks

• The company's aggressive capital expenditures and rapid expansion of cloud capacity, while essential for meeting demand, could strain financial resources, impacting net margins and cash flows.
  
• The exit from the advertising business, which generated $300 million in revenue in the previous fiscal year, could negatively affect total revenue, at least in the short term.
  
• Oracle's heavy reliance on large, long-term contracts for cloud services introduces revenue recognition delays, potentially affecting short-term earnings visibility.
  
• Continual supply constraints mentioned could hinder Oracle's ability to deliver services promptly, possibly impacting revenue growth and customer satisfaction.
  
• A 1% currency headwind was noted, which, while seemingly small, underscores the risk exchange rate volatility poses to revenue and earnings, especially given Oracle's global operations.

Valuation

• The analysts have a consensus price target of $148.69 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 $175.0, and the most bearish reporting a price target of just $98.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $71.9 billion, earnings will come to $19.6 billion, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $142.61, the analyst's price target of $148.69 is 4.1% higher. 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.