Goldman Sachs Upgrades Oracle to Buy

Goldman Sachs analyst Gabriela Borges assumed coverage on Oracle (NYSE: ORCL) with a Buy rating (up from Neutral) and a price target of $240.00.

“We assume coverage on Oracle at Buy (from Neutral) with 27% upside to our 12 month price target of $240.

We are positive on Oracle’s technology advantage in AI compute workloads, and believe the company has the potential to gain share vs. the cloud cycle (backlog suggests ~25% share of new cloud revenue in 3 years from <10% today).

The question then becomes the timing and unit economics associated with the capex build to support backlog being recognized as revenue.

We are tactically positive on the stock as we believe visibility will improve over the next 12 months: 1) we expect revenue reacceleration over the course of this year as more tranches of the 1.2 GW Abilene data center come online; 2) we expect gross profit to trough in the next 12 months, followed by meaningful acceleration, based on our bottom up build of fixed and variable COGS; 3) we believe we are close to peak debt raises, as our build suggests Oracle can execute on its data center build with less than $80mn in debt raised (consistent with management comments of <$100bn), of which $18bn has already been raised and a further $38bn is already anticipated.

For Oracle to be an investment rather than a trade, we look to better gauge the sustainability of growth and pricing beyond 2030, as well as in its database and apps businesses (~30% of sales).

At $190, we believe the market is already discounting Oracle/Street forecasts of $20 in FY30 in EPS, and we see a scenario where gross margin is below the Street this year ahead of acceleration.

As such, we approach risk/reward for the stock by considering bear/base/bull scenarios that discounts OpenAI commitments by 100%/30%/0% to arrive at $10/$15/$25 of EPS or a 4:1 upside/downside skew when applying a 10x-25x range of P/E multiples.”

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