Oracle (NYSE:) is at a pivotal juncture as it navigates the evolving AI landscape. The company’s strategic positioning within the AI infrastructure market will significantly influence its future growth.
With year-to-date performance that outpaces many of its peers, Oracle’s stock is up 23%, driven by its strong positioning in AI hardware and the perceived scarcity of such resources, driving companies to Oracle Cloud Infrastructure (OCI) has led. , Morgan Stanley analysts said in a Monday note.
However, while the potential for AI appears promising, analysts remain cautiously optimistic and maintain an equal-weight rating with a $125 price target.
Oracle management has driven more than 50% year-over-year (YoY) growth in cloud infrastructure revenue in FY25, driven by robust Remaining Performance Obligation (RPO) build-up in recent quarters.
This suggests that as infrastructure capacity becomes available, Oracle is ready to turn these liabilities into significant revenue. However, the lack of transparency around RPO duration poses challenges when using this metric alone to accurately forecast revenue in the short to medium term.
“We estimate approximately $0.9 billion in AI infrastructure revenues in FY24, which could approach $10 billion+ in FY27, driven by additional GPU generations and the recent OpenAI deal,” the analysts said.
This growth is expected to be fueled by the deployment of additional GPU generations and the recent OpenAI partnership.
However, the analyst model includes conservative assumptions, including significant usage discounts and price concessions, given Oracle’s premium pricing compared to competitors and the uncertainties surrounding usage dynamics in newer GPU generations.
In addition to AI infrastructure, Oracle’s traditional infrastructure revenues are also expected to grow, albeit at a more moderate pace. Analysts estimate that traditional infrastructure revenues could grow from about $5.5 billion in FY24 to about $10 billion in FY27.
This growth is expected to be driven by a mix of large customers such as TikTok and Uber (NYSE:), along with the broader installed base. However, the forward estimates do not reflect significant growth in large logos, as potential usage growth could be offset by slowing TikTok usage and regulatory concerns.
A large portion of Oracle’s future AI infrastructure revenue could come from its partnership with OpenAI. Early reports indicate that Oracle is building a ~100K GB200 cluster, which will be used by OpenAI for inference workloads.
Given the uncertain timing and nature of this workload, analysts forecast a revenue contribution of ~$0.2 billion in FY25, growing to almost ~$3 billion in FY27. However, there is a chance of upside surprises depending on how these factors play out.
Oracle’s capital expenditure (capex) estimates remain a key focus for analysts. The GPU investment implied by the revenue growth indicates a related investment of approximately $45 billion between FY25-27, compared to the analyst model which reflects approximately $91 billion in capital expenditure over the same period.
However, execution risks remain, particularly around the timing and availability of capacity, the sustainability of pricing, and the sustainability of Oracle’s cloud infrastructure revenues, which are highly concentrated among a few large customers.
Risk-Reward Analysis: Tepid growth limits upside
Analysts’ risk-reward analysis presents three scenarios for Oracle:
Bull Case ($180.00 target price): Increased OCI adoption accelerates cloud revenues, while database cycle increases licensing revenues, driving CY25 earnings per share to $7.11. Investors are offering Oracle a ~25x multiple, reflecting ~15% earnings growth in CY25.
Base case ($125.00 target price): Cloud services continue to see strong adoption, offsetting weak licensing revenues, pushing organic revenue growth towards 10% in FY25. Operating margins are rising modestly, with investors able to offer a ~19x multiple on CY25 EPS based on ~11% EPS growth.
Bear Case ($95.00 target price): The adoption of cloud solutions is failing to offset declining license revenues, leading to margin compression and slowing earnings per share growth. Expected EPS is ~16x in CY25, with investors skeptical of the longer-term benefits of Oracle’s cloud transition.
