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SUMMARY
Parkev Tatevosian, CFA, examines Oracle's recent stock volatility and evaluates whether the current downturn presents a buying opportunity. The analysis focuses on Oracle's aggressive capital spending, negative cash flow projections, and the long-term outlook for returns on its AI infrastructure investments.
MAIN POINTS
- Oracle's stock has experienced significant volatility in 2026, dropping over 35% year to date.
- Oracle's revenue and backlog have surged, but the company is borrowing and issuing shares to fund rapid expansion.
- Operating profit margins have improved, but heavy capital expenditures are causing negative free cash flow.
- Despite booming demand, Oracle's return on invested capital remains mediocre, contributing to investor skepticism.
- Projections show negative free cash flow through 2028, with positive cash flow expected to begin in 2029 and accelerate thereafter.
- Oracle appears moderately undervalued based on various valuation methods, but the buy rating is given with medium conviction due to long-term risks and uncertainties.
DETAILED ANALYSIS
Oracle's stock performance in 2026 has been marked by sharp fluctuations, with the share price falling more than 35% year to date. The stock experienced a dramatic swing, starting the year at approximately $130 per share, peaking above $250, and then retreating to $126. This volatility reflects a complex mix of strong business fundamentals and significant investor concerns.
On the positive side, Oracle's cloud computing segment and overall business have seen robust growth, with revenues climbing to $67 billion in the trailing twelve months, up from $40 billion in 2021. The company's backlog has reached hundreds of billions of dollars, signaling sustained demand. However, to capture this growth, Oracle is investing heavily in AI infrastructure, particularly data centers, requiring it to borrow tens of billions of dollars and issue new shares.
These capital expenditures far exceed the company's internally generated cash flow, resulting in negative free cash flow. While operating profit margins have rebounded to 33.3% from a low of 27% in 2023, these figures do not account for the upfront cash outlays for infrastructure, which are only gradually reflected in the income statement through depreciation. Historically, Oracle's return on invested capital has hovered around 10%, barely above its weighted average cost of capital, raising questions about the efficiency of its investments.
Investor sentiment remains cautious, as evidenced by Oracle's forward price-to-earnings ratio of 11.6, its lowest in years. Forecasts indicate that free cash flow will remain negative through 2028, with a projected turnaround in 2029 when Oracle is expected to generate $16 billion in free cash flow, rising to $75 billion by 2035. The fair value per share, based on discounted cash flow analysis, is estimated at $129, suggesting the stock is moderately undervalued.
Nevertheless, the recommendation to buy Oracle on this dip is given with medium conviction, reflecting the long-term uncertainty and risks associated with the scale and timing of returns from its current investment cycle.
LINKS
- YouTube channel membership page for exclusive perks and access.
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- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with a viewer discount.
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