“`html
Cloud Concerns: Is It Time to Sell Oracle Stock? Investors considering Oracle’s stock should assess its elevated valuation metrics, which present compelling reasons to sell by 2025. Currently, Oracle trades at an EV/EBITDA multiple of 21.89x, far above the Zacks Computer-Software industry average of 16.41x. This high valuation may indicate that substantial future growth is already included in the stock price, posing a risk; any minor underperformance could lead to significant losses.
Analysis of ORCL’s Elevated EV/EBITDA Ratio
Image Source: Zacks Investment Research
Despite outperforming the broader market with a 25.8% rise over the last six months—compared to the Zacks Computer and Technology sector’s 4.9% and the S&P 500’s 6.4%—Oracle’s strong performance has led to a stock valuation that may struggle to hold steady.
Review of 6-Month Stock Performance
Image Source: Zacks Investment Research
Future Growth May Be Already Accounted For
During the second-quarter earnings call, CEO Safra Catz projected that Oracle’s cloud revenues would reach $25 billion this fiscal year, alongside a year-over-year increase of 52% in Oracle Cloud Infrastructure (OCI) revenues. Additionally, the company noted a remarkable 336% rise in GPU usage, sparked by heightened demand for AI capabilities.
However, these promising growth indicators seem largely reflected in the current share price. Catz also reported that capital expenditures are expected to double in fiscal 2025 compared to 2024, which could hinder profit margin growth in the immediate future.
Facing Competition in Cloud Services
Despite the impressive 52% growth in OCI, Oracle still trails behind major competitors like Amazon AMZN-owned Amazon Web Services, Microsoft MSFT Azure, and Alphabet GOOGL-owned Google Cloud. Though Oracle’s multi-cloud partnerships benefit database transitions, they also underscore its reliance on a broader cloud ecosystem.
The company’s remaining performance obligation (RPO) rose 50% to $97.3 billion, indicating strong revenue visibility ahead. However, about 39% of total RPO is projected to convert to revenue within the next 12 months, introducing uncertainty about growth after that period.
Challenges With Free Cash Flow
Oracle’s trailing 12-month free cash flow currently stands at $9.5 billion. Notably, there was a concerning 6% decline in free cash flow last quarter, despite a 19% rise in operating cash flow. This divergence is primarily due to high capital expenditures, which totaled $4 billion in the second quarter. Given the ongoing investments in data center expansion, free cash flow might remain pressured.
Slowing Growth in Software as a Service (SaaS)
Oracle’s SaaS revenues rose by 10% in the second quarter, a slower growth rate compared to infrastructure growth. The Cloud Application (SaaS) division produced $3.5 billion in revenue, yet this decline suggests possible market saturation or increased competition within the enterprise application sector.
The Zacks Consensus Estimate for Oracle’s fiscal 2025 revenue is set at $57.65 billion, representing an 8.85% year-over-year growth. Earnings estimates for the same period stand at $6.22 per share, indicating an 11.87% increase, unchanged over the past month.
Image Source: Zacks Investment Research
To see the latest earnings estimates and surprises, check Zacks Earnings Calendar.
Uncertain Returns on AI Investments
Oracle has heavily invested in AI infrastructure, boasting what it calls “the world’s largest and fastest AI supercomputer” with up to 65,000 NVIDIA H200 GPUs. Chairman Larry Ellison emphasized Oracle’s leadership in AI workloads, yet the return on these hefty capital investments remains uncertain in an increasingly competitive AI field.
Final Thoughts: Profits Might Be Worth Taking
Although Oracle’s transition to the cloud has shown notable advancements, the current stock valuation appears to exceed its fundamentals. With an EV/EBITDA multiple of 21.89x, alongside slowing free cash flow and significant upcoming capital expenses, it may be prudent for investors to consider taking profits by 2025.
The current high valuation leaves little room for mistakes, particularly as competition intensifies in the cloud infrastructure and applications sectors. For those who have gained from Oracle’s recent success, 2025 may be the right time to reassess their investments and possibly shift towards more attractively valued opportunities in the tech market. Oracle currently holds a Zacks Rank #3 (Hold). You can see the comprehensive list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks’ Research Chief Names “Stock Most Likely to Double”
Our team of experts recently identified 5 stocks with the highest potential to gain +100% or more in the upcoming months. Among these, Director of Research Sheraz Mian highlights one stock set to climb the highest.
This top pick features among the most innovative financial firms, boasting a rapidly growing customer base of over 50 million and a diverse range of cutting-edge solutions. This stock is poised for significant gains. While not all of our elite selections yield winners, this one could greatly outperform previous Zacks’ Stocks Set to Double, like Nano-X Imaging which surged +129.6% in just over nine months.
Free: See Our Top Stock And 4 Runners Up
Would you like the most recent recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report.
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
Microsoft Corporation (MSFT): Free Stock Analysis Report
Oracle Corporation (ORCL): Free Stock Analysis Report
Alphabet Inc. (GOOGL): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
“`
