Oracle (ORCL), amassed $664 billion... still a 'low-confidence' buy?

▲ Oracle (ORCL)/AI generated image

Oracle (ORCL) confirmed demand for AI infrastructure by accumulating $664 billion in remaining performance obligations (RPO). However, the cash flow burden due to massive data center investments was identified as its biggest weakness.

According to Nasdaq on September 15 (local time), Oracle's business growth is accelerating as new orders from its customers pour in, amounting to billions of dollars. Investment expert Parkev Tatevosian analyzed that Oracle's RPO reached $664 billion, an increase of $290 billion from the previous year. This is also an increase of $30 billion compared to the previous three months.

Performance growth was also evident. Revenue in the most recent quarter recorded $19.3 billion, a 30% increase, and data center capacity added 850 megawatts. Operating profit increased by 57% to $6.7 billion. Oracle projected revenue growth for the next quarter at 32% based on the median value, and annual revenue at a minimum of $90 billion.

The problem is the business structure that requires data centers to be built first. Operating cash flow in the most recent quarter surged by 184% from $8.1 billion in the same period last year to $23.1 billion. Advance payments received from customers alone amounted to $11.3 billion. However, capital expenditures during the same period recorded $28.5 billion, and free cash flow showed a deficit of $5.4 billion.

There were also movements to reduce financial burden. Oracle's long-term debt decreased by approximately $5 billion, from $122 billion to $117 billion. Tatevosian assessed that customer advance payments are a key factor in reducing the financial burden of data center construction. However, he predicted that free cash flow would remain in deficit this year, next year, and until 2028.

Tatevosian assessed Oracle's estimated price-to-earnings ratio at 14x, which is a low level compared to the past several years. On the other hand, he presented his calculated fair stock price at $128. He maintained a 'buy' opinion on Oracle but assigned a low level of confidence, stating that he became 'a bit more optimistic' about the company after these earnings.

[Article Key Summary]

-Oracle's remaining performance obligations expanded to $664 billion, an increase of $290 billion from the previous year.

-Revenue increased by 30% and operating profit by 57%, but capital expenditures of $28.5 billion resulted in a free cash flow deficit of $5.4 billion.

-Tatevosian maintained a 'buy' opinion on Oracle but assigned a low confidence level due to cash flow burden.

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