Oracle is gaining an encouraging earnings outlook as it transforms its position in the market to become a major GPU-as-a-Service (GPUaaS) and AI infrastructure provider. However, its investment case still hinges on free cash flow support even as the AI narrative keeps getting louder.
On September 4, Morgan Stanley analyst Sanjit Singh raised the price target on Oracle Corporation (NYSE:ORCL) to $210.00 (from $207.00) while maintaining an “Equal Weight” rating. The price target raise may reflect optimism around its improved GPUaaS gross margin story, but execution risk and lack of free cash flow support may temper enthusiasm.
Improving AI Margins Support Oracle’s Story
Oracle Corporation’s fiscal fourth-quarter numbers demonstrate operational strength. The software vendor reported better-than-expected earnings and revenue for the fiscal fourth quarter while also raising its profit forecast for the year.
Revenue for the quarter increased 21% year over year, which ended on May 31. Net income rose to $4.22 billion, or $1.45 per share, compared to $3.43 billion, or $1.19 per share, a year ago.
Total cloud revenue jumped 47% to $9.9 billion, while Oracle Cloud Infrastructure revenue surged 93% to $5.8 billion. Remaining performance obligations reached a record $638 billion, increasing 363% year-over-year. The company said that $75 billion of its AI contracts include GPUs either prepaid by customers or supplied directly by them.
Morgan Stanley in its note particularly highlighted an improving GPUaaS gross margin trajectory for Oracle. While none of this growth is in question, Oracle’s execution and free cash flow numbers are.
Oracle Faces Significant Cash Flow Pressure
Oracle’s AI opportunity is extremely capital intensive, with its Capex increasing from $21 billion in fiscal 2025 to $55.7 billion in fiscal 2026. The company did generate $32 billion of operating cash flow, but free cash flow fell to negative $23.7 billion. The numbers imply how investment still exceeded the cash generated by operations.
A central part of the thesis, for Oracle, is funding the buildout. The company raised $43 billion of debt and $5 billion of equity financing in fiscal 2026. For fiscal 2027, the company said it expects capital expenditures of up to $95 billion in fiscal 2027, though it expects repayments from customers for up to $25 billion of that.
Morgan Stanley is unwilling to apply Oracle’s historical valuation multiple despite improving earnings expectations.
What Hedge Funds Are Saying
Oracle remains widely owned amongst hedge funds. At the end of the second quarter, 119 hedge funds held the stock, up from 115 in the previous quarter. One of its largest hedge fund shareholders, Fisher Asset Management, held roughly 13.3 million shares after increasing its position 39%.
Overall, Oracle’s bull case characterized by its improving AI narrative and GPUaaS margins, and accelerating OCI growth is hard to miss. However, the question remains whether the economics improve fast enough to offset its enormous capital requirements.
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