Premium cloud compute company trades at a discount given intrinsic values

Oracle Corporation (NYSE: ORCL)

Troy Slack Note: This is an adapted version of my application to UWIG. Comes as I re-enter into Oracle as the new Value portfolio consolidated numerous positions across slackline. Company Overview

Oracle is a global technology company that specializes in cloud infrastructure, database and data management, and produces and manages enterprise application software for businesses, governments, and regulated industries. The company has Cloud and Software, Hardware, and Services segments. In Q1 FY27, ORCL reported $19.3 billion in revenue and a net income of $4.7 billion. At the time of the application, the company traded at a forward P/E ratio of 16.1x with a market capitalization of $418.6 billion.

Investment Thesis

Oracle, supported by its strong demand, backlog and premium market position is well positioned for strong growth in the next two years.

● Oracle Cloud Infrastructure (OCI) has scaled exceptionally well, supported by aggressive leverage over recent operating history. This has been supported by the boom of the AI ecosystem, which has driven exceptional earnings for Oracle, and by extension, the technology sector and XLK as well. The company's upmarket position and strong economic moat positions it as a leader in cloud compute and data infrastructure that is supported by continuing AI investment. Recent AI developments, such as Astra, Opus & Sonnet 5.5, and Dots, coupled with the firm gaining more than $30B of new AI contracts in Q1 FY27, show that the sector is still pushing AI development forward at a fast pace.

● Oracle’s growth will be further supported by its backlog of $664B (+46% YoY) and $300B of booked OCI capacity by OpenAI that is set to deliver starting in 2027. This provides Oracle with tangible, backlogged revenue that the company is expanding capacity for, which will support the company’s expansion and competitive position. Furthermore, Oracle currently trades at a 21.5x P/E ratio, vs XLK, which trades at a 36.5x P/E ratio, as of 9/30/26, considered undervalued compared to the ETF purely on a P/E basis. On historical performance, ORCL is down about 51% over the past year vs XLK up 39%.

Growth Positioning

XLK comprises roughly 34% semiconductor manufacturing, 22% software, and 12% communications equipment, according to FactSet. It faces issues in cyclicality within the semiconductor industry, supply chain risks, and the fund’s 13% revenue exposure to mainland China and export controls. While Oracle faces the same systematic risks as the rest of the ETF, it does not face as wide of a range of risk as the companies within the ETF. Oracle’s main risks are AI spending, high leverage / financing risk, and supply chain risk, but retains high upside from cloud computing revenues, bolstered by its strong backlog. Oracle is also cheap compared to its own relative history on a P/E basis, trading at 21x compared to the ~30-40x range it traded at in May, at the peak of positive AI sentiment. Oracle trades at 14.7x EV/EBITDA, cheaper than its 3-year historical average of around 20-24x EV/EBITDA. Oracle trades at a 16.1x forward P/E, which is lower than its four year history, which has seen a range of around 19-30x forward P/E, and has a Price/Earnings-to-Growth (PEG) Ratio of 0.53x, showing that analysts expect strong future growth. Additionally, less than 25% of Oracle's debt matures over the next three years, and the company has remained committed to an investment grade credit rating.

Competitive Outlook

Given they both provide specialized GPU-powered cloud infrastructure for AI workloads, the closest direct competitor to Oracle given its business mechanics is CoreWeave, who also shares many of the same debt and customer characteristics. Oracle remains a leading supplier of database systems and has a premium market positioning – the company had GPU contracts renewed or resold at a 20% premium to prior contracts, according to the Q1 FY27 investor call, additionally seeing 97.9% GPU utilization in Q1. Oracle has high switching costs, as it is risky for database users to migrate to competitors given operational risk. Oracle also has numerous intangibles, namely its reliability and scalability among web and cloud compute applications. Compared to its peer, CoreWeave, Oracle trades at a lower EV/Sales for FY2 (7.2x vs 10.7x) despite seeing stronger FY2 EBIT margins ( 37.6% vs 15.4%). However, Oracle does see around 600bp lower EBITDA margins than CoreWeave, primarily due to differences in cash operating costs, and D&A differences. Oracle also maintains strong ROE, seeing 41% in Q1 FY27, which is estimated to stabilize in the high 20% range, according to FactSet. Note that while ROE is inflated by high leverage and stock buybacks, more normalized NTM numbers put ROE at around 28-30%, according to FactSet. That would be meaningfully above its peers’ NTM ROE, such as Microsoft, ServiceNow, CoreWeave and MongoDB, which are estimated to see 23.9%, 26.2%, -21.3%, and 17.3% respectively, according to FactSet comps.

Risks & Mitigations

● Rising bond yields pose the largest threat to Oracle, given its current leverage. Already highly levered, taking on more debt in a yield-elevated environment is not optimal, especially given the company’s desire to return to lower levels of leverage. Company maintains an investment grade credit rating (albeit one rating above junk), meaning the company can still issue bonds at investment-grade yields rather than paying junk-level yields.

● Diminishing demand for AI products and cloud compute is also another massive risk for the firm, as it could significantly hurt the company's backlog and revenues. Additionally, Bloomberg reported that Project Jupiter data center in New Mexico could be delayed, which would hurt the firm's ability to add compute capacity. Additionally, debt-averse activity could lead to a less acquisitive nature of the company in the near term. However, the company has software applications and hardware business that removes some of that idiosyncratic risk.

Catalysts:

● Additional scaling of OCI, via infrastructure buildouts such as the Project Jupiter data center coming online is crucial to ensuring capacity and continued cloud compute growth.

● Continued Backlog conversion, and upcoming Q2 earnings where the company will show how they fared against guidance, additionally, prepaid contracts coming online starting Jun 2027 and beyond.

Conclusion

Over a two-year investment horizon, Oracle is well positioned for growth because of its premium market position, competitive advantages, and strong backlog growth. Oracle's competitive moat stems from its switching costs, network effects with developers, and reliability pairs well with its flexible products that attract first-time users, and OCI servers with high utilization. While the firm faces risks from the demand for GenAI, supply chain challenges, and datacenter buildout timelines, the company has numerous intangible strengths that will limit the stock’s downside, namely its scalability that grants it economies of scale, along with hundreds of billions in RPOs to support future performance.

Analysts have a target price of the company around ~$230 on average, and something I found interesting is that Morningstar, who is typically very conservative on their AI valuations, is within that range as well. Given the firms history and improving financial strength, this target valuation, while high, is certainly not impossible to achieve.

Source for all data: FactSet, Q1 FY27 Investor Call, Bloomberg, Yahoo Finance. All rights reserved. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only and should not be considered a solicitation to buy or sell any security.