Oracle (ORCL), a technology industry leader, positions itself formidably in the AI infrastructure market, but the stock is richly valued. Despite a high price-to-earnings ratio, my valuation analysis shows that the stock could still perform well. However, given that my model indicates a 10-year annual return of less than 15% per annum, I am neutral on the stock rather than bullish. Typically, I have a 15%+ threshold in annual returns for a Buy rating.
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Oracle’s AI Strategy Is Hinged on Enterprise Solutions
Oracle’s Cloud is built to handle demanding AI tasks, including training large AI models using Nvidia’s (NVDA) graphics processing units. This contributes to a strong future market position that supports my neutral stance on the richly valued stock. For example, Oracle integrates AI directly into its business software, such as enterprise resource planning and human resources platforms, implemented in leading businesses worldwide.
Unlike competitors who treat AI as an add-on, Oracle integrates AI deeply into its systems in a full-stack model that allows full operational workloads and chains of command to include automation and enhanced, fact-based decision-making.
Oracle’s AI offerings have proven valuable for itself and the enterprises it serves. A study by Forrester on Oracle’s Digital Assistant showed an 181% return on investment over three years. Oracle’s overall AI strategy has contributed to strong demand for Oracle Cloud Infrastructure, which saw a 52% revenue growth in Q2 of Fiscal 2025.
ORCL’s management has outlined plans to double the company’s capital expenditures in Fiscal 2025 compared to Fiscal 2024. In Q2 of Fiscal 2025, the company spent approximately $4 billion on capital expenditures alone, a 72% increase from the prior quarter, largely driven by AI infrastructure investments. During the Q2 Fiscal 2025 earnings call, Oracle CEO Safra Catz mentioned that Oracle Cloud revenue is expected to surpass $25 billion for the financial year.
Given the above research, Oracle appears to be well-positioned both in terms of product and service offerings related to AI and in return on investment from its capital expenditures. As a result, the stock looks appealing, given the company’s operations, but its valuation tells a different story.
Oracle Is Richly Valued Due to Exuberance About AI
I do not buy Oracle stock at the present valuation because the long-term annual returns appear to be less than 15%. However, in my discounted earnings model, the current stock price has a 17% margin of safety for investment, and the indicated 10-year price compound annual growth rate is 13.7%. This is still strong. Although my rating is neutral, it could also be a Moderate Buy.
Oracle’s trailing 12-month revenues are $54.93 billion. A conservative but bullish outlook could reasonably suggest an 11% compound annual growth rate in these revenues over the next 10 years, leading to a December 2034 trailing 12-month revenue of $156.7 billion for Oracle.
It is reasonable to forecast some expansion in the company’s net income margin due to AI and automation capabilities. As a result, my net margin estimate for Oracle in 10 years is 25%. Therefore, I estimate Oracle’s net income to be $39.175 billion in December 2034.
Oracle’s basic weighted average shares outstanding have decreased by ~5% annually over the last 10 years. Therefore, I will assume this trend continues (but moderates somewhat). If the company achieves a 3% annual reduction in its outstanding shares over the next 10 years, it will have 2.03 billion shares in December 2034, as its trailing 12-month shares outstanding are 2.76 billion.
Therefore, I estimate the company will have a GAAP earnings per share of $19.31 in December 2034.
The company’s forward GAAP price-to-earnings ratio is currently 37, but it is 26 as a five-year average. I will use the midpoint of these—31.5—for my terminal multiple. The result is a December 2034 stock price target of $608.
As the current stock price is $169, my forecast indicates a 10-year stock price compound annual growth rate of 13.7%. In addition, the company’s weighted average cost of capital is 11.54%. When discounting back my December 2034 forecast to the present day using the weighted average cost of capital as my discount rate, the implied current intrinsic stock price is $204, indicating a margin of safety for investment of 17%.
Oracle’s AI Growth Is Not Without Competition and Risks
Oracle’s most significant competitors are Amazon Web Services (AMZN), Microsoft (MSFT), and Google (GOOGL) (GOOG). Oracle excels in enterprise software tailored for business-critical operations, which helps the company differentiate itself from its competitors’ broader focus.
However, Oracle faces risks as it competes with Amazon, Microsoft, and Google, all of which entered the AI arms race earlier than Oracle. In addition to a late start, the company is battling to maintain customer perceptions that could easily be tarnished if any of Oracle’s users are subject to cyberattacks. In a world transitioning toward quantum computing, Oracle needs to ensure it prioritizes its partnership with QMware and Nvidia to develop resistance to quantum malware that could develop in the future.
What Does Wall Street Say About Oracle?
On Wall Street, Oracle has a consensus Moderate Buy rating with an average ORCL price target of $193.38, indicating a potential 14.45% upside over the next 12 months. Therefore, this could support a more bullish stance on the stock than my conservative and high-standard Hold rating.
Conclusion: Oracle Is Richly Valued but Could Still Perform Well
For investors who do not mind aiming for less than a 15% annual return in the stocks they choose, Oracle could still work well in portfolios. The company is well-managed and has a robust, forward-focused approach to AI. However, its presently high price-to-earnings ratio indicates investors might be wise to wait for a pullback before initiating a position.
