Investment Thesis

Oracle (NYSE:ORCL) is back on the front foot, with fiscal Q1 2025 delivering eye-popping guidance. Arguably, its RPO figure being up 53% y/y stole the limelight for this quarterly report.

But beyond that, there was a ”well-argued” narrative that Oracle’s cloud offering is now the biggest part of its overall business and growing rapidly.

All in all, this makes paying 22x next year’s non-GAAP EPS an attractive valuation and worthwhile considering. Let’s jump to it.

Oracle’s Near-Term Prospects

Oracle is a global technology company that provides a wide range of products and services to help businesses improve their operations. Its key offerings include cloud infrastructure (”OCI”) and databases which cater to various industries.

Oracle’s innovations aim to enhance business productivity and efficiency, incorporating advanced features such as embedded AI. The company’s partnerships with major cloud providers like AWS, Google Cloud, and Microsoft Azure further expand the reach of its cloud services, particularly its renowned Oracle Database.

Oracle’s fiscal Q1 2025 cloud business has shown strong growth, with its total cloud revenue up by 22% in the quarter, driven by both its SaaS and IaaS segments.

Cloud database services grew 23%, while OCI consumption revenue surged by 56%. The company’s cloud remaining performance obligation (”RPO”), a leading measure of future revenue, grew more than 80%, reflecting robust demand for longer-term cloud contracts, while its total RPO was up 53% y/y.

What’s more, Oracle noted in the earnings call its ambitious plans to double its capital expenditure to meet increasing demand and expand its cloud regions globally, pointing to sustained near-term cloud growth and strong prospects.

However, Oracle faces significant competition in the cloud space from giants like AWS, Google, and Microsoft, especially as these companies also enhance their cloud offerings.

The lower margins associated with its OCI business, although improving with time is expected to dampen Oracle’s near-term profitability margins versus its traditional legacy offerings.

Additionally, Oracle’s rapid growth in demand has led to supply constraints, which the company is addressing through increased automation and larger data center buildouts, but these logistical issues still represent a key headwind and are expensive to roll out.

Given this balanced background, let’s now discuss its fundamentals.

Oracle Guides for At Least Double-Digits

Oracle is no longer a fast-growing company. And that’s the appeal of this setup. This is a company that was perceived by investors to simply be ticking along.

What investors didn’t expect to see is that Oracle’s RPO increased by 53% y/y, with 38% of its RPO being recognized in the next twelve months.

This allowed Oracle to confidently guide that it would grow by at least double digits in the next twelve months.

For my part, I’ve implied this to mean around 11% topline growth, but I wouldn’t be surprised to see that the figure that ultimately gets reported is higher than this.

Given this renewed growth rate, let’s now think about its valuation.

ORCL Stock Valuation — 22x Next Year’s Non-GAAP EPS

As an inflection investor, you must always have a firm grasp of a company’s balance sheet. Oracle holds about $75 billion of net debt. For me, this consideration keeps me out of this name. Even if I’m bullish on a company, what stops me in most cases is the shape of its balance sheet. I like to invest in companies where their balance sheet is an asset and not a liability to the investment thesis.

That being said, there’s still a lot to like about Oracle. Case in point, the high-end of fiscal Q2 2025 EPS guidance (as reported), is expected to be up 12% y/y to nearly $1.50.

Given Oracle’s momentum, together with the $1.39 of non-GAAP EPS just reported, this gives the sense that Oracle’s non-GAAP EPS this year could reach close to $6.35 per share, which is higher than analysts’ current estimate of $6.27 non-GAAP EPS per share.

Consequently, this means that investors are being asked to pay around 24x this year’s non-GAAP EPS.

Now, if we presume that as Oracle’s non-GAAP EPS continues to grow at 11% y/y into next year, this could put Oracle on a path towards $7.05 of non-GAAP EPS. In sum, this leaves Oracle priced at 22x next year’s non-GAAP EPS.

Now, astute readers would be quick to opine, that’s largely the same multiple that Oracle has been trading at for some time, see below. What’s the upside then?

Here’s the thing, Oracle is now growing its topline at a quicker pace than investors previously expected. So, you get a highly profitable enterprise, that is well-positioned in the growing cloud sector, and with more growth than expected. That’s generally a very attractive setup that is worth thinking considering.

The Bottom Line

Paying 22x next year’s non-GAAP EPS for Oracle is a compelling investment because the company has firmly positioned itself as a major player in the rapidly expanding cloud sector.

With double-digit growth, a surge in its cloud business, and strategic partnerships with industry giants like AWS, Google, and Microsoft, Oracle is on a clear path to sustained revenue and earnings expansion. While Oracle’s balance sheet does carry around $75 billion in net debt, the company’s operational momentum and improved cloud margins make this valuation reasonable, particularly as demand continues to outstrip supply.