Oracle’s (ASX: ORCL) remaining performance obligations for the first quarter increased 359% to $455 billion, primarily due to expanding relationships with large language model providers. Management also expects Oracle cloud infrastructure to grow 77% in 2026 and reach a five-year annualized growth of 70%.

Why it matters: Oracle’s five-year OCI revenue outlook of $144 billion means the business will have a size similar to Google Cloud by fiscal 2030, which completely blew our expectations. Incremental capital expenditure is necessary for Oracle to ramp up its data center capacity for new workloads.

  • We have a fair degree of confidence in OCI achieving its five-year revenue goal based on this quarter’s colossal RPO figure. Oracle’s relationship with esteemed artificial intelligence firms, such as OpenAI, as well as its participation in Stargate, puts it center stage for AI training and inference workloads.
  • We now model a peak capital expenditure of $88 billion by fiscal 2030, close to the investment scale of the other three leading hyperscalers. Consequently, we forecast three years of negative free cash flow for Oracle due to substantial investment pressure.

The bottom line: We are raising our fair value estimate for wide-moat Oracle to $330, from $205, after incorporating a materially higher OCI growth outlook. We see further upside to Oracle stock following the 28% after-hours jump, if Oracle can convert OCI bookings into revenue as planned.

  • We believe OCI, like other hyperscalers, enjoys high switching costs due to technical challenges and additional costs of egressing data. Meanwhile, many enterprises are also getting comfortable with sourcing cloud computing capacity from multiple vendors, giving latecomers like OCI a chance.

Coming up: Oracle is hosting a financial analyst day at its AI World conference in October, where we expect to hear more about its long-term capex forecasts, a centrepiece of Oracle’s plan to meet significant client demands.

Remarkable AI data centre demand drives Oracle’s explosive growth

Oracle has long been a major supplier of both relational database systems and enterprise software. The company’s relational database boasts a premium market positioning that offers industry-leading security and stability performance with a higher price tag. Although Oracle Database still plays a dominant role in handling some of the world’s most mission-critical data workflows for financial institutions and government agencies, the company’s influence in the database industry has been slowly declining, especially given the recent rise of open-source and NoSQL options. Meanwhile, Oracle is still in the process of building out its cloud infrastructure, or OCI, and cloud application, or OCA, products. Many Oracle customers are yet to transition from license-based software to cloud-based offerings.

While we do not believe Oracle is out of the woods on all fronts, we think the company has made substantial progress. With the debut of Oracle Database@AWS in December 2024, Oracle has finally reached partnerships with all three major hyperscalers to host Oracle Database and infrastructure at their data centers. We believe this is a win-win-win arrangement that benefits Oracle, partners, and customers at the same time. Physically locating servers at partners’ data centers also ensures that Oracle continues to provide best-in-class database management experience in the cloud era, a crucial move to keeping customers looking for top database solutions within Oracle’s ecosystem.

Besides multicloud databases, OCI also embodies other technological innovations, such as Alloy and sovereign cloud, that make it a flexible and secure option. Its rapid scale shows that customers are thirsty for additional cloud options that are easy to deploy and cost-effective. We think Oracle’s current product lineup is in the best shape it has been in for some years, and the company has the capacity to retain the company’s traditional on-premises customers that are slowly migrating to Oracle’s portfolio of cloud solutions. In our view, the cloud transition for Oracle customers is still in the early stage, and we think it will serve as a tailwind to Oracle’s revenue growth in the coming years.

Bulls say

  • Scaling of Oracle Cloud Infrastructure has helped retain customers, port workloads to the cloud, and create new cloud service revenue, all of which should continue in the coming years.
  • Oracle’s relational database should be able to keep 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 Oracle users to the company. Artificial Intelligence demand should boost growth further.

Bears say

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

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