Oracle

Oracle reported in-line fourth-quarter results, with total revenue up 21% to $19 billion and cloud revenue up 47% to nearly $10 billion. The company delivered more than 1.2 gigawatts of data center capacity in fiscal 2026, underpinning cloud infrastructure's 77% year-over-year growth.

Why it matters: Strong market demand and solid data center ramp-up are exactly what Oracle needs to reach its long-term revenue goals. In addition to deploying $56 billion in capital expenditure in fiscal 2026, Oracle expects to increase total capital expenditure to $90 billion-$95 billion in fiscal 2027. In the fourth quarter, Oracle's global GPU utilization rate stood at 97.5%. 92% of the GPUs received contract renewals with their original customers, while the remaining 8% secured new customers within 90 days. Healthy market dynamics support Oracle to double down on its infrastructure investments. Oracle's biggest data center projects are on or ahead of their ramp-up schedules. Contracted data centers generally begin to deliver service within 18 months, consistent with the industry standard. The Bloom Energy partnership effectively alleviates power supply as a near-term bottleneck.

The bottom line: We trim our fair value estimate for narrow-moat Oracle to $207 from $220, primarily due to higher-than-expected capital expenditure forecasts, which have compressed the firm's free cash flows. Shares look moderately undervalued following the 11% postearnings selloff. We are of two minds about Oracle's expanding capital expenditure. The $90 billion-$95 billion investment in fiscal 2027 should bring nearly 3 GW of new GPU cloud capacity online, translating to over $30 billion in recurring revenue once fully ramped up. On the other hand, with $20 billion-$25 billion in customer prepayments and $40 billion in new debt and equity issuance, the remaining $30 billion in capital outlay will consume most of Oracle's operating cash flow, pushing its balance sheet to its limit.

Oracle cloud applications' 10% year-over-year growth came slightly below our expectations. However, multicloud database remains a bright spot, with revenue up 404% and bookings up 325% year over year. We attribute its positive growth momentum to the expanded database availability with cloud partners.

We think the enterprise software market remains volatile, as enterprise IT decision-makers compare and contrast different tools for their artificial intelligence-native tech stacks. Notably, Oracle is experimenting with new pricing schemes for its agentic AI products, including token bundles and outcome-based pricing. Although these innovations are likely to drive faster AI adoption among customers, we believe further penetration is necessary before AI agents become a material growth driver for Oracle Cloud Applications.

For the first quarter, Oracle expects total revenue to grow between 27% and 29%, and cloud revenue to grow between 58% and 64%. In addition, Oracle reaffirmed its revenue outlook of $90 billion and adjusted earnings per share of $8.05 for fiscal 2027. As cloud infrastructure becomes a larger part of the company's revenue mix, gross margin should continue to decline in the near term. Following a 470-basis-point contraction in the growth margin in fiscal 2026, we forecast an additional 460-basis-point decrease in the gross margin in fiscal 2027.

Our fair value estimate for Oracle is $207 per share, which implies a fiscal 2027 enterprise value/sales multiple of 8 times and an adjusted price/earnings multiple of 26 times. Following a period of rapid growth, Oracle's forward adjusted price/earnings should gradually step down to 15 times by fiscal 2030. We expect Oracle’s annual revenue growth to accelerate to an average of 31% over the next five years as the adoption of Oracle Cloud Infrastructure, or OCI, and Oracle Cloud Applications, or OCA, continues to tick up. The ramp-up of AI data centers is a major driver of Oracle’s top-line growth. Cloud should become Oracle’s key growth driver and accounts for around 85% of the company’s revenue by fiscal 2030. Meanwhile, we expect a five-year CAGR of 62% for OCI and 8% for OCA. Total cloud revenue (OCI plus OCA) is expected to grow around tenfold over the next eight years.

We acknowledge the high degree of uncertainty baked into our forecast, including long-term demand from key customers like OpenAI and Oracle's ability to secure the necessary resources for its data center build-out. As cloud services become the mainstream choice for customers, we model a low-single-digit revenue decline for both the license and hardware segments over the next decade. The services segment should fare better with low-single-digit revenue growth as customers continue to rely on Oracle for data infrastructure consulting services. Our fair value depends on AI demand remaining healthy relative to supply, allowing Oracle to pursue its data center build outs, and operating its data centers at full capacity.

Over the next five years, we expect Oracle's cloud infrastructure buildout to significantly drive down its GAAP operating margin, from 31% in fiscal 2026 to 28% in fiscal 2029. After that, with economies of scale, Oracle's operating margin should gradually climb back up to 33% by fiscal 2035. We also think that Oracle’s research and development expense ratio will remain in low double digits as the competition among database and enterprise cloud products intensifies.

We think Oracle has a narrow economic moat supported by high switching costs. Database systems and other enterprise software that Oracle sells are critical to the day-to-day operation of modern enterprises. Companies tend to stay with the same vendor for years on the application side and even decades for core systems to ensure optimal business continuity. In addition, cloud infrastructure revenue is also very sticky due to the high cost and risk of data ingress and egress. These features should keep Oracle’s return on invested capital above its cost of capital over the next 10 years, as it is a key player in these areas.

After introducing “Generation 2 Cloud” in 2018, Oracle has seen an acceleration in the growth of its Cloud Infrastructure, or OCI, and Cloud Applications, or OCA, businesses. In our view, OCI will not catch up with Amazon Web Services, or AWS, Microsoft Azure, or Google Cloud Platform, or GCP, on a pure market share basis, and we forecast a single-digit enterprise cloud market share for Oracle by 2027. OCI’s rapid near-term growth should dramatically decrease its unit cost due to economies of scale, but we don’t see cost advantage becoming a moat source because there is no clear evidence of Oracle possessing a unique process power that can ramp up its data center capacity at a systematically lower cost than its competitors. We believe OCI is an important piece that support's Oracle's overall moat rating of narrow due to its strong switching costs. Once a customer gets on board, they tend to stay with the same cloud provider due to the complexity, cost, and risk of data migration across different clouds. Also, a multicloud strategy, where companies use two or more public cloud providers, is becoming more common across enterprises. Given the limited number of cloud providers that are at scale, we have a hard time identifying a scenario that necessitates a complete retreat from OCI for enterprise customers that already signed up for it.

We see strong switching costs with Oracle Database, too. Typically, databases serve as the organization’s central nervous system, facilitating the exchange of data across different enterprise software. If a company would like to change its database system provider, the process of “rewiring” how it stores and accesses data can involve significant monetary and time-related costs that often exceed its internal IT capabilities. Alibaba and Amazon provided us with some recent case studies in attempting to migrate off Oracle databases. It took both companies more than five years to execute the migration, and the process would be even longer if we included the planning stage. Moreover, switching database systems can lead to significant operational risks if the company would like to keep business as usual during the transition. Overall, we believe the number of existing Oracle Database customers that have the capability of migrating away their databases is small, and they need a very compelling reason to justify the significant cost and potential disruption that could happen during the migration process.

Similar to Oracle Database, we see strong switching costs across Oracle’s applications lineup. The company has built a robust array of enterprise software through acquisitions, including enterprise resource planning, or ERP, supply chain management, or SCM, and human capital management, or HCM, platforms. It also has cloud-based enterprise software targeting small and medium-sized businesses called NetSuite. Clients can deploy Oracle’s applications via software-as-a-service, cloud license, and on-premises license versions. Implementing a new software package typically requires significant time and financial resources from the customer. Employees onboarding new enterprise software also face a learning curve, which can sometimes lead to lost productivity. There is not much that AI can help with to accelerate the process, given the magnitude and strong deterministic nature of workflows that Oracle systems are handling. Therefore, we usually see long upgrade cycles for enterprise software, especially among companies in traditional industries that lack digital transformation capabilities.

Besides switching costs, we also see traces of intangible assets in Oracle. Ever since pioneering the commercialization of relational databases in the 1980s, Oracle has faced strong competitive pressure from other closed- and open-source relational database products like Microsoft SQL Server, IBM Db2, and PostgreSQL. More recently, the rise of NoSQL databases, such as MongoDB, and data warehouses, such as Snowflake, has made the database market even more competitive. However, Oracle remains one of the top three database vendors due to its reliability, scalability, and security. Enterprises nowadays rely significantly on data to be the backbone of their business—internally and through their products. Therefore, how such data is stored and accessed becomes one of the highest-stake decisions for chief information officers. Although Oracle Database products usually come with a higher price tag, many enterprises are still willing to pay the premium in exchange for its reliability and performance.

According to DB-Engines, Oracle has been the most popular database management system for over 12 years in a row based on a score calculated using Google search trends, technical discussions on Stack Overflow, and engineer profiles on LinkedIn. Meanwhile, Oracle owns another popular database, MySQL, through the acquisition of Sun Microsystems in 2010. The company monetizes MySQL through an enterprise-grade, cloud-based MySQL product called Heatwave MySQL to solidify its leadership in the database realm. As one of the top database system vendors, we believe Oracle is uniquely equipped to handle some of the most important data workflows in the world that require the highest level of availability and accuracy. An example of such a workflow is real-time order execution at stock exchanges. One can imagine the chaos that would occur if a major stock exchange needed to halt all transactions during trading hours because of database glitches. In this case, the potential economic loss can far exceed the price premium Oracle charges its customers.

Oracle also operates a smaller hardware and services business that provides physical servers, storage systems, and consulting services to customers. While these two segments do not merit a moat by themselves, we view them as a crucial part of the overall Oracle ecosystem. Oracle’s proprietary servers, storage, and networking hardware are designed to optimize Oracle Database performance. The Exadata computing platform is the industry’s first to handle mixed database workloads without compromising efficiency. They provide a seamless experience to customers looking for hybrid cloud solutions. Without the Exadata hardware, Oracle cannot guarantee top-of-the-class database performance when customers transition across different computing environments. Potential compatibility issues can occur when, for example, a customer tries to connect different Oracle databases between Microsoft Azure servers and third-party on-premises servers.

Scaling of Oracle Cloud Infrastructure has helped retain customers, port workloads to the cloud, and create new cloud service revenue, all of which should continue in the coming years.

Oracle Database should be able to keep its market leadership as customers continue to depend on its industry-leading performances in terms of stability and security.

Oracle Cloud Infrastructure was built with flexibility and ease-of-use in mind, which could bring a significant base of first-time Oracle users to the company, strengthening top-line results.

Demand for generative AI can undershoot expectations, potentially causing Oracle to miss its long-term revenue and earnings goals.

Oracle needs to overcome multiple supply chain challenges to deliver the contracted data center capacity. Delays in the supply chain can negatively affect Oracle’s revenue growth.

Oracle’s balance sheet is among the most leveraged within our software coverage, which could limit operational flexibility and future acquisition opportunities.