Oracle's stock is totally misunderstood and should be a 'go-to' AI play, says this analyst

By Hannah Pedone

A Bernstein analyst thinks two key investor concerns will soon subside

Share of Oracle were up on Wednesday.

Oracle could be closer than investors realize to generating serious returns on its artificial-intelligence investments. And according to one analyst, there are big catalysts on the horizon.

Shares of Oracle (ORCL) are down 36% so far this year, with the company seemingly at the center of several AI "controversies," according to Bernstein analyst Mark Moerdler. Those include whether the AI buildout is a bubble, whether data centers can support strong economics and whether the company's big AI customers can succeed in their own right.

However, Moerdler believes Oracle should be a "go-to" stock for investors, and his $325 price target implies room for the stock to rise 153% from current levels near $128.

There are two potential catalysts for Oracle on the horizon, Moerdler wrote in a late Tuesday note.

For one, OpenAI's expected IPO could provide major clarity for investors on how OpenAI, a major customer, will be able to pay for the computing power that it has committed to buying.

On Tuesday, OpenAI told investors that the company grew its revenue by roughly 50% to $10 billion from the second to the third quarter, the Wall Street Journal reported. The company is preparing to launch its IPO next year, management has said.

See also: Who will benefit more from AI agents when it comes to spending - companies or you?

Investors have seen Oracle's stock as largely tied to OpenAI's fate, as roughly $300 billion of Oracle's $664 billion in remaining performance obligations - or the dollar value of contracted services that have yet to be delivered to customers or booked as revenue - comes from OpenAI.

Moerdler said that once investors see OpenAI's IPO filing, concerns over this commitment will become less of a mystery.

Another long-term catalyst for Oracle, Moerdler believes, is that the company is expected to generate positive free cash flow by the second half of its next fiscal year, which ends in May 2028. Management announced that outlook at its investor day in October.

Free cash flow refers to the money a company has left after it covers operating costs and equipment purchases, and analysts tracked by FactSet had been expecting negative free cash flow over the corresponding period.

Moerdler is modeling a "decreasing need" for Oracle to raise cash. He pointed out that the company announced at its investor day that it is committed to "limiting" additional capital raises through the 2030 fiscal year, beyond $10 billion in equity and $10 billion debt financing. Oracle won't require additional funding beyond that, and should be on track for its free cash flow goal, Moerdler believes.

The company officially went out to raise that combined $20 billion last week.

"I think there's real merit in being the best-funded and probably the first of the hyperscalers to be fully funded during this investment cycle," CFO Hilary Maxson told MarketWatch earlier this week.

Moerdler is not alone in his optimism. The company has been gaining praise from analysts, especially since its last earnings report in September, as the company showed more encouraging signs that its capital spending will translate to returns. Currently, 72% of analysts polled by FactSet hold a buy rating for the stock.

Moerdler believes that as the company reports new data over the coming quarters, the stock should "rebound" he said.

Emily Bary contributed reporting

-Hannah Pedone

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-11-26 1313ET