Tuesday, Goldman Sachs adjusted its price target on shares of Oracle Corporation (NYSE:ORCL), increasing it to $130 from the previous $115, while maintaining a Neutral rating on the stock. The adjustment followed Oracle's third fiscal quarter earnings report, which demonstrated a 14% after-hours increase in stock price, attributed to solid performance metrics.
Oracle reported revenues that aligned with market consensus, a significant 49% growth in its Infrastructure as a Service (IaaS) segment, and earnings per share (EPS) of $1.41, surpassing consensus estimates by 2%. Notably, the company's reported performance obligations (RPO) and current RPO (cRPO) grew by 29% and 15%, respectively. The more than $15 billion quarterly increase in RPO was highlighted as a substantial change in bookings driven by large Oracle Cloud Infrastructure (OCI) contracts.
The firm acknowledged Oracle's positive fundamental direction but pointed out the need for Oracle to execute on its expanding backlog and maintain approximately 50% growth in IaaS through fiscal year 2026 without significantly increasing capital expenditures (CapEx).
With Microsoft (NASDAQ:MSFT)'s CapEx expected to rise over 50% in FY24, Oracle's anticipated CapEx reduction of 15% in FY24, while targeting over 35% growth in FY25, raises questions about whether Oracle can sustain its IaaS growth without a corresponding increase in CapEx.
Goldman Sachs presented two scenarios for Oracle's future. In an optimistic 'blue-sky scenario,' if Oracle can improve its CapEx to IaaS revenue ratio, the firm sees a potential for $14.5 billion in free cash flow (FCF) in FY26, driven by 50% compounded IaaS growth and approximately 12% revenue growth.
This scenario, valued at 34 times enterprise value to FCF (EV/FCF), could suggest a share price of around $145. On the other hand, a 'gray-sky scenario' anticipates a deceleration in IaaS growth against less efficient CapEx, possibly resulting in FY26 FCF of $12.3 billion and, with a 28x EV/FCF ratio, a valuation of approximately $95 per share.
The firm concluded that a more positive stance could be considered if the optimistic scenario proves to be conservative, but for now, it reiterates a Neutral rating with the updated price target of $130.
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