Stock of the Week - Oracle (16.01.2025)

Oracle Corporation (ORCL.US), once considered a legacy database vendor, has transformed into a formidable player in the cloud and AI infrastructure space. With a strategic focus on cloud services and AI capabilities, Oracle has seen its stock rise approximately 50% over the past year, outperforming many of its cloud-focused competitors.

Q2 FY25 Results

• Revenue: $14.06 billion (+8.6% year-over-year) vs. estimate $14.12 billion
• Adjusted EPS: $1.47 vs. $1.34 year-over-year (+10%)
• Cloud Revenue (IaaS + SaaS): $5.9 billion (+24% year-over-year)
• Cloud Infrastructure Revenue (IaaS): $2.4 billion (+52% year-over-year)
• Cloud Application Revenue (SaaS): $3.5 billion (+10% year-over-year)
• Operating Margin: 43% (stable year-over-year)
• Remaining Performance Obligations: $97 billion (+50% year-over-year)

Strategic Evolution 

Oracle's transformation is built upon three fundamental pillars. The first pillar centers on AI infrastructure leadership, where the company has made remarkable progress by announcing plans to build the world's largest GPU compute cluster. This groundbreaking initiative will deploy 131,072 NVIDIA Blackwell GPUs in the first half of 2025, creating a computing infrastructure six times larger than what competitors currently offer.

The second pillar revolves around strategic partnerships that have significantly expanded Oracle's reach and capabilities. The company has secured crucial collaborations with industry giants, including Meta for AI development using Llama models, Microsoft and OpenAI for AI workloads, Amazon Web Services for database integration, and Adarga Ltd for defense and security AI applications. These partnerships demonstrate Oracle's ability to work collaboratively across the technology ecosystem.

The third pillar showcases Oracle's innovative approach to infrastructure development through its ambitious nuclear-powered data center initiatives. The company is currently developing an 800-megawatt data center and has plans for an even larger facility exceeding one gigawatt, both powered by nuclear reactors. This unprecedented scale of development illustrates Oracle's commitment to meeting the growing demands of AI computing while addressing energy sustainability concerns.

Growth Drivers 

The company's AI infrastructure demand has seen remarkable growth, with GPU consumption increasing by 336% in a single quarter. This explosive growth is supported by significant partnerships with major AI players and a growing pipeline of AI-related deals and infrastructure requirements.

The expansion of cloud services represents another major growth vector for Oracle. The company's cloud database services are growing at an impressive rate of 28% year-over-year, supported by 17 active cloud regions and plans for 35 more in partnership with hyperscaler partners. This multi-cloud strategy has enabled Oracle to reach a broader market and serve diverse customer needs more effectively.

Oracle's SaaS portfolio continues to demonstrate robust growth and market penetration. The Fusion Cloud ERP and NetSuite Cloud ERP solutions have achieved growth rates of 18% and 19% year-over-year respectively. The company has also gained significant momentum in developing and deploying industry-specific cloud applications, meeting the specialized needs of various sectors.

Management Guidance 

Looking ahead, Oracle's management has provided a clear roadmap for continued growth. The company expects Q3 FY25 revenue growth between 7-9% in USD, with cloud infrastructure growth projected to exceed 50% in FY25. Management has also guided for non-GAAP EPS of $1.47-$1.51 for Q3, demonstrating confidence in the company's ability to maintain profitability while investing in growth initiatives.

Valuation

Based on our analysis of Oracle using historical data and company financials, we've developed projections incorporating various growth scenarios. Our base case assumes a 3.5% terminal revenue growth rate and a 10% terminal WACC. These relatively conservative assumptions reflect Oracle's mature business profile while acknowledging its growth potential in cloud services.

Under these assumptions, our DCF model suggests an intrinsic value of $138.64 per share, indicating a potential downside of approximately 12.5% from the current share price of $158.31. However, as with all DCF valuations, the results are highly sensitive to input assumptions. The sensitivity matrices provided illustrate how the valuation varies under different scenarios for Operating Margin, Revenue Growth, Terminal WACC, and Terminal Revenue Growth rates.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

To evaluate Oracle's relative valuation, we analyzed a peer group of leading technology companies including Microsoft, ServiceNow, Palo Alto Networks, and Fortinet. This peer comparison provides valuable insights into Oracle's market positioning and valuation metrics.

The multiple-based valuations present mixed signals across different metrics. Oracle currently trades at a P/E of 37.26x and a forward P/E of 22.53x, both below the peer group mean. This suggests Oracle trades at a significant discount to its peers on earnings-based metrics. The company's P/S ratio of 7.96x and forward P/S of 7.26x are also below the peer group means of 14.81x and 12.86x, potentially indicating undervaluation.

Using the mean peer multiples suggests significant upside potential, with implied valuations ranging from $162.49 (P/BV) to $395.28 (P/E). The cap-weighted approach, which accounts for company size differences, indicates more modest upside potential with values ranging from $65.80 (P/BV) to $258.49 (P/S).

Source: Bloomberg Finance LP, XTB Research

Regarding the Gordon Growth Model analysis, Oracle has demonstrated a consistent track record of dividend payments. Using an 8% dividend growth rate and a 9.1% required rate of return, based on historical trends, the model suggests an intrinsic value of $172.96 per share, representing approximately 9% upside from the current price. The sensitivity matrix shows that under more optimistic scenarios (higher growth rates or lower required returns), the implied valuation could exceed $200 per share, while more conservative assumptions still generally support the current market price.

Source: Bloomberg Finance LP, XTB Research

Recommendations: 

Oracle has 41 recommendations, with 26 "buy" and highest price of $220, 14 “hold” and one “sell” with a price of $130. The 12-month average stock price forecast is $197.84, implying a 24.9% upside potential from the current price.

Technical analysis (Daily interval): 

The stock is trading above the 61.8% Fibonacci retracement level after a successful retest and subsequent rebound. This level coincides with the start of the gap-up in September at $153. Bulls are likely to target the 38.2% Fibonacci retracement level, while bears may focus on the 78.6% Fibonacci retracement level to potentially close the gap. The RSI has begun to diverge higher, indicating potential bullish momentum, while the MACD is narrowing, suggesting a possible bullish crossover. Source: xStation