This article is a continuation of our free newsletter from July 17, Can Oracle Become the Next $1 Trillion AI Stock?
Find out the following below:
- If Oracle can become the next $1 trillion AI stock – or if Stargate is a one-time deal that will leave the stock flat from exorbitant GPU costs
- Bull, base and bear case scenarios, with detailed revenue and segment projections showing where and when revenue upside lies
- An invitation to our next webinar – exclusive only to subscribers. In our upcoming 1-hour webinar, we will detail our buy, trim and sell zones for Oracle and other leading AI stocks.
Oracle Cloud May Grow Much Faster than Big 3
Though Oracle is growing off a much smaller cloud base than say Azure, robust IaaS momentum could drive its Cloud growth at a much faster rate than the Big 3 – defined as Microsoft, Amazon and Alphabet — over the next few years.
As stated above, consensus currently models in $46 billion in IaaS revenue in FY28. For the IaaS segment to increase 4.5x from FY25’s $10.2 billion in revenue, this requires growth at a 65.2% CAGR, or a slight deceleration from >70% YoY in FY26 to >60% YoY in both FY27 and FY28.
This rapid IaaS growth could fuel a 40% CAGR for Oracle’s total Cloud growth by FY28, taking its Cloud segment from $24.4 billion to $66 billion. This 40% CAGR will far outpace AWS’ growth in the high-teens, and Google Cloud and Azure in the high-20% to low-30% range.
While this represents a significant reshapement of Oracle’s business model towards high-growth cloud, it also implies that Oracle is aiming to be much more competitive in AI and firmly establish itself as the fourth AI hyperscaler. Despite coming off a much smaller revenue base, Oracle’s forecasted 40% cloud CAGR suggests that it will start to take market share from the Big 3.
Scenario Analysis
Quick Look into FY26, Long-term Targets
Before we present the scenario analysis, it’s prudent to briefly touch upon Oracle’s FY26 guidance and long-term targets, as these pertain directly to the three scenarios.
For FY26, Oracle slightly raised its revenue guidance, now expecting revenue to be $67 billion, for YoY growth of 16.7%, up $1 billion from its prior view for $66 billion. Management remains confident in exceeding its 20% growth target for FY27, or $80.4 billion.
Oracle has maintained its FY29 revenue target of $104 billion, which would require growth at a 14.5% CAGR since FY24. Given FY26 was raised, if the company maintains that CAGR then it will see 4% higher revenue in FY29 versus that target. For comparison, the consensus estimate for FY29 has risen $6 billion over the last three months, from $100.5 billion to $106.5 billion.
Bull Case Projects 55% Upside
Based on the model below through FY29, Oracle could see IaaS maintain a robust 59% 4-year CAGR to nearly $65 billion in revenue, with a deceleration to 40% YoY in FY29. This could drive Cloud revenue at nearly a 39% CAGR to more than $90 billion, or 85% of revenue, doubling its share from 43% in FY25.
This also assumes an (8%) CAGR in licensing, support, hardware and other revenue, driven by increased cannibalization of on-prem licensing beyond FY27 as Oracle’s cloud shift accelerates.
Overall, this bull case projects revenue slightly below FY27’s target, but sees much greater upside versus consensus by FY29 as the $30 billion deal begins to kick in and as Oracle benefits from increasing synergies with OpenAI.
To note, OpenAI is optimistically forecasting $125 billion in revenue by 2029, which could translate into tens of billions to Oracle from AI infrastructure costs. This forecast also likely hinges on limited hardware constraints to allow Oracle to meet such high demand.
However, high capex requirements to build out multiple GWs of capacity are likely to keep free cash flow limited – this model projects FCF margins in the mid-single digits by FY29. On a cumulative basis from FY26 through FY29, free cash flow is expected to under $7 billion.
The bull case scenario also assumes adjusted operating margins are slightly softer in FY26 and FY27 as amortization of intangible assets decreases, before expanding into FY29 as cloud and IaaS mix expands substantially.
Adjusted net margin is expected to increase slightly towards 32%, on the possibility that high capex requirements lead to debt raises and increased interest expenses.
Under this scenario, topline growth is expected to remain rather robust at an 18.8% CAGR from FY25, more than four points ahead of Oracle’s guided 14.5% CAGR. Peak revenue growth is forecast for FY28 at almost 22%, while EPS growth is expected to be >20% YoY for FY27 through FY29. As a result, Oracle is assigned a 10x P/S multiple and a 31x P/E multiple.
This is approximately in line with Oracle’s peak top-line valuations over the past five years and a 15% discount on the bottom line, accounting for a slight YoY deceleration in FY29. However, this is around a 40% premium to Oracle’s five-year average P/S multiple and a 30% premium to its five-year average P/E.
This valuation is also approximately in line with Microsoft’s current five-year average forward P/S and P/E multiples of 10.7x and 30.5x. To note, Oracle is projected to have a much higher cloud mix at 85% of revenue, growing at a 39% CAGR, versus Microsoft’s Intelligent Cloud at 66% share by 2029 on a 16% CAGR.
These assumptions return a price target of $386, or a 55% return, propelling Oracle into the $1 trillion club.
Base Case Sees Potential 27% Upside
The base case scenario assumes revenue remains roughly in line with consensus estimates through FY27, with low-single digit upside in FY28 and FY29 as Oracle begins to recognize growth from the recent mega-deal.
Under this scenario, IaaS growth will decelerate a bit quicker into FY29, with revenue at 36% YoY versus 40% YoY in the bull case scenario. This still results in a 57% IaaS CAGR to $62.3 billion in revenue, driving a 37% cloud revenue CAGR, nearly 2 points below the bull case.
In the base case, Oracle is assumed to maintain operating margin in the 43% level moving forward, with some slight net margin expansion to the 31% range. This would project FY29 EPS of $11.69, or almost 2% ahead of consensus.
This scenario sees Oracle maintaining solid topline and bottom-line growth rates, at almost 16% YoY for revenue and 18% YoY for adjusted EPS in FY29. In this, Oracle is assigned an 8.5x P/S multiple and a 27.1x P/E multiple, a 15% premium to its current five-year averages of 6.9x and 23.7x, respectively, as the company exceeds its long-term targets on strong cloud momentum.
These assumptions return a $316 price target, or 27% upside from current levels.
Bear Case Projects Flat Return
The bear case scenario assumes revenue again remains roughly in line with consensus estimates through FY27, before lagging consensus in FY28 and FY29. However, this scenario still assumes Oracle remains ahead of its FY29 target due to the mega-deal, as even a delayed ramp to 2029 still likely derisks that $104 billion revenue target.
IaaS revenue is projected at a 56% CAGR through FY29, with growth decelerating rather sharply from 70% in FY27 to 34% by FY29. SaaS growth is estimated at a slower 11% CAGR, with mid-single digit growth in FY29. This combines for a 35% cloud revenue CAGR, nearly 4 points slower than the bull case and 2 points slower than the base case. Even with these assumptions, FY29 revenue is still projected more than 1% ahead of Oracle’s target at $105.2 billion.
In this scenario, margins are projected to decline marginally through FY27 on account of that decreasing amortization expense, with further softness into FY29 from an aggressive pursuit of capacity expansion and high capex in an effort to support stronger IaaS growth.
This also assumes that Oracle will turn to the debt markets to fuel this capacity expansion, adding hundreds of millions to interest expenses and creating up to a ($0.20) EPS headwind by FY29.
As such, topline growth is projected to peak just below 20% in FY27, before decelerating to the low 14% range by FY29, resulting in a four-year CAGR of 16.8%. Similarly, EPS growth would peak at 21% in FY27 before decelerating 9 points to 12% YoY by FY29.
As such, Oracle is assigned a 7x P/S multiple and 23.3x P/E multiple, approximately in line with its current five-year averages, accounting for this two-year deceleration in growth rates. It’s also possible under this scenario that cumulative FCF generation through FY29 remains negative to barely positive, assuming capex growth comes in above >15% YoY in both FY28 and FY29.
This scenario would return a price target of $249, or essentially flat with its current share price.
Conclusion
Oracle laid out rapid growth targets for fiscal 2026 driven by strong AI momentum, forecasting cloud infrastructure growth to accelerate 20 points and total cloud revenue to accelerate 16 points. Coupled with r >100% RPO growth guidance, its expanded arrangement with OpenAI and its mega $30 billion/year cloud deal, confidence is increasing in Oracle’s long term cloud trajectory.
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Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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