Oracle (ORCL) is a buy at current levels, even though the stock is down about 26% year to date.
The trading range and valuation
For anyone worried about the downside, ORCL has stayed in a wide band from the low $100s up to around $160-165. You can buy some here, or wait for $110-$120 if it drops. The stock trades in the low 20s on a price-to-earnings (PE) ratio, and possibly below the S&P 500 on forward PE. One point in the discussion put the forward PE at 16 times, which is very cheap. ORCL grows faster than the S&P 500 as a whole and will become higher quality over time, even if it is not yet.
The earnings picture
The last report beat on both sales and earnings, and the beat came from the right place: the high-growth AI compute segment. The company also raised its outlook language. Last quarter it said it expected $90 billion in total fiscal-year revenue; this quarter it said "at least $90 billion," meaning the beat is flowing through and the year is tracking as guided.
Capex is lumpy, but the company did not guide for higher capex than expected. Financing needs, both debt and equity, did not come in worse than expected. So ORCL is a company that sits at the center of AI, where earnings and cash flow are getting better while capex and financing needs are not getting worse. It burned less cash than expected. On that basis, ORCL is worth well above the S&P 500 on a PE.
Why the stock sold off anyway
The market is actually buying the AI story. The recent drop came from separate issues, not the results:
- On Thursday, September 10th, the first after-hours reaction to the print and guide sent the stock up 6%, then it settled to up 4%. There was some resistance at $165, where at least one holder trimmed a position bought at a much lower cost. The market reaction was fine.
- On Friday, news came that Larry Ellison canceled plans to sell millions of shares. The market read this negatively because ORCL needs to finance itself partly by issuing more stock, so a large insider sale had been priced in as supply.
- By Monday the stock was down 5%, partly from that news and partly because interest rates moved up. ORCL is especially exposed to higher rates because it carries a heavy debt load and a burdensome capital structure. Oil and the broader macro backdrop added pressure.
The key fact: when the earnings picture itself came out, the stock rose 4-6%. With all these other worries now priced in, and the stock trading at 16 times earnings without breaking below $120, this is a reasonable entry point.
Are the debt and cash-flow worries justified?
The concerns about the credit rating, the debt taken on to fund the buildout, and negative free cash flow are justified in the sense that they have hurt the stock. They are not justified in terms of what ORCL is worth on its own. If you believe the story the company has been proving out over the last couple of quarters, ORCL should trade north of 20 times earnings - a market or above-market multiple, not a below-market one.
The bull argument on the balance sheet: ORCL is pacing well on cash flow and earnings. In a few years the debt burden will not look bad, because capex will die down while sales, profits, and cash flow scale up, which sharply improves the capital structure. Three to five years out, EBITDA should be fully satisfactory against net debt.
The main risk
A large share of the revenue comes from OpenAI. If OpenAI runs into trouble, or if the capital markets dry up and put a hole in the revenue or cash-flow story, then the debt looks terrible and the bears have a strong case. OpenAI raised financing earlier this year and looks good for the money it owes ORCL over the life of its contract, described as about $300 million.
ORCL is integral to AI. As long as the buildout continues, even with some ups and downs in pace, the company should grow past its capex, its debt, and its interest expense within the next few years. ORCL was trading down about 4.5% at the time of this discussion.
