Completed a discounted cash flow (DCF) valuation of Oracle (NYSE: ORCL) to assess its fair value amid the company’s strategic push into cloud infrastructure and AI computing.
To support the base case assumptions in this valuation, I included external forecasts and recent company performance data that highlight Oracle’s long-term growth potential.
According to Simply Wall St, Oracle is expected to deliver:
- Revenue growth: 14.5% per year
- Earnings growth: 16.6% per year
- EPS growth: 15.6% per year
- Return on equity: 35.8% in the next 3 years These estimates support the optimistic revenue growth used in the model and justify the base case terminal growth rate of 4.0%.
Oracle’s cloud business is scaling aggressively. According to their Q4 FY25 earnings release:
- Oracle Cloud Infrastructure (OCI) grew 52% year-over-year in Q4 FY25
- Expected cloud growth in FY26 is projected to exceed 70%
- Total cloud revenue (apps + infrastructure) is forecasted to rise from 24% to over 40%
- Multicloud revenue grew 115% quarter-over-quarter These trends help justify the projected recovery in free cash flow and reinforce Oracle’s potential to generate long-term cash through cloud and AI services.
- Free Cash Flow Forecast (2026–2030): Based on revenue growth, a 32% operating cash flow margin, and elevated CapEx reflecting Oracle’s $21B+ investment in cloud infrastructure.
- Base Case WACC: 7.14%, calculated using CAPM for cost of equity (7.80%), cost of debt (2.88%), and a 12% effective tax rate.
- Terminal Growth Rate: 4%, supported by Oracle’s expansion into high-growth markets like AI, multicloud, and recurring cloud revenue.
- Fair Value Estimate: $207 per share. Compared to Oracle’s market price of ~$255, the stock appears overvalued based on conservative FCF recovery.
- Sensitivity Analysis: Valuation ranges from $105 to $185 depending on WACC and terminal growth assumptions.
- Oracle reported negative free cash flow in FY25, driven by a surge in capital expenditures as the company rapidly builds out its Oracle Cloud Infrastructure (OCI) to meet growing demand from AI workloads. This does not indicate a weakness in the business model but rather a strategic investment phase.
- Instead of using a flat FCF growth assumption, the model separates operating cash flow and CapEx, allowing a more accurate reflection of the company’s investment cycle. This approach assumes near-term pressure on free cash flow due to high CapEx, followed by a rebound in later years as cloud infrastructure spending moderates and recurring revenue increases. The base case assumes a return to $27B in FCF by 2030, supporting a long-term view of Oracle as a scalable and resilient cash-generating business.
- Simply Wall St. Oracle Future Growth Forecasts. https://simplywall.st/stocks/us/software/nyse-orcl/oracle/future
- Oracle Investor Relations. Q4 FY25 and Full-Year Financial Results. https://investor.oracle.com/investor-news/news-details/2025/Oracle-Announces-Fiscal-2025-Fourth-Quarter-and-Fiscal-Full-Year-Financial-Results/default.aspx