After Earnings, Is Oracle Stock a Buy, a Sell, or Fairly Valued?

Oracle ORCL released its fiscal 2025 third-quarter earnings report on March 10. Here’s Morningstar’s take on Oracle’s earnings and stock.

Key Morningstar Metrics for Oracle

• Fair Value Estimate: $184.00
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Oracle’s Earnings

• Oracle’s third-quarter results slightly missed our expectations and the company’s guidance. However, its total remaining performance obligations jumped to $130 billion, adding $33 billion in just one quarter. We are raising our fair value estimate to $184 per share from $172 due to a higher revenue growth outlook based on strong booking trends.
• Oracle Cloud Infrastructure remains the firm’s growth engine, and it continues to expand its cloud footprint by bringing the 101st cloud region online. A strong tailwind in artificial intelligence should continue to drive OCI’s high growth, with demand outstripping supply. We expect more market share gains for OCI in the enterprise cloud market.
• Oracle is progressing with its multicloud database partnerships with Amazon AMZN, Microsoft MSFT, and Alphabet GOOG. Multicloud database revenue saw 92% year-over-year growth this quarter. The partnership facilitates a smoother process for customers to transition their on-premises database workflow to the cloud. Further expansion of the partnerships should reinforce Oracle’s switching costs.
• Overall, we think Oracle stock is moderately undervalued after last week’s stock market pullback. It is currently trading in 4-star territory.

Fair Value Estimate for Oracle

With its 4-star rating, we believe Oracle stock is undervalued compared with our long-term fair value estimate of $184 per share, which implies a fiscal 2025 enterprise value/sales multiple of 10 times and an adjusted price/earnings multiple of 31 times.

We expect annual revenue growth to consistently reach the low teens between fiscal 2026 and 2030 as adoption of OCI and Oracle Cloud Applications continues to tick up. Cloud services and license support should become Oracle’s key growth drivers and account for over 90% of the company’s revenue by fiscal 2034. Meanwhile, we expect a five-year CAGR of 38% for OCI and 9% for OCA. Total cloud revenue should grow more than fivefold over the next 10 years, surpassing $100 billion annually by fiscal 2034. 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.

Read more about Oracle’s fair value estimate.

Economic Moat Rating

We think Oracle has a wide moat supported by high switching costs. Database systems and other enterprise software 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 several decades for core systems to ensure optimal business continuity, which should keep Oracle’s return on invested capital above its cost of capital over the next 20 years, as it is a key player in these areas.

Switching costs are the main moat source for Oracle’s cloud services and license-based business. Typically, databases serve as the organization’s central nervous system, facilitating the exchange of data across different enterprise software. Changing a database system provider can involve significant costs that often exceed a company’s internal IT capabilities. Alibaba BABA and Amazon AMZN provided recent case studies in migration from Oracle databases. It took both companies more than five years to execute the process—even longer including the planning stages.

Read more about Oracle’s economic moat.

Financial Strength

We think Oracle is in good financial standing. The company’s cash balance is at the lowest level in years, but its cloud business’ strong cash flow generation and well-planned debt schedule should help it meet its capital needs.

As a result of the $28 billion all-cash Cerner acquisition in 2022, Oracle’s cash balance dropped to $11 billion in fiscal 2024. We think the company’s cash balance will remain low in the near term, given the strong capital expenditure pressure to keep up its cloud infrastructure capacity. Our forecast shows Oracle’s fiscal 2025 total capital expenditure should increase by $9.1 billion, or 133%, compared with fiscal 2024, and we model a continuous increase of capital expenditure, surpassing $29 billion by fiscal 2034.

Read more about Oracle’s financial strength.

Risk and Uncertainty

We give Oracle a High Uncertainty Rating due to potential challenges during its cloud transition and intensified competition among database products, which brings increased uncertainty to our revenue forecasts.

The conventional method for Oracle to sell its database software was through licenses. There were no intermediaries between Oracle and customers, which gave it stronger bargaining power in pricing and contract renewal. Nowadays, cloud marketplaces become enterprises’ go-to when they need new software to process workflows. Oracle often has to sell its database and enterprise software through marketplaces operated by competitors, but this also massively expands its potential customer base.

Read more about Oracle’s risk and uncertainty.

ORCL Bulls Say

• OCI scaling has helped retain customers, port workloads to the cloud, and create new cloud service revenue, which should continue in the coming years.
• Oracle’s relational database should be able to maintain its market leadership as customers continue to depend on its quality features, such as data partitioning which brings incomparable load-balancing efficiency.
• OCI was built with flexibility and ease of use in mind, which could bring a significant base of first-time users to the company. AI demand should boost growth further.

ORCL Bears Say

• Oracle could suffer below-average growth as customers choose specialized database software that runs their workloads more efficiently.
• Oracle Cloud’s scale is much smaller than the leading hyperscalers', putting them at a cost disadvantage.
• Oracle’s balance sheet is among the most leveraged within our software coverage, which could limit the firm’s operational flexibility and future acquisition opportunities.

This article was compiled by Gautami Thombare.