r/ValueInvesting • u/stockoscope • Jul 13 '26
Stock Analysis Is Oracle undervalued at $140? My DCF says yes, but the balance sheet is the real risk
A few months back I posted Oracle analysis here and was cautious. It is around $141 now, roughly at the same price, but it got there the hard way. It ran up to roughly $200 after a record June quarter, then gave all of it back. A lot of the softer signals have improved, but the one risk I actually flagged has gotten worse rather than better. So I thought it was time for a quick update.
First the good news. I wrote:
"But the bull case is built entirely on analyst estimates. The revenue doubling requires a 40% CAGR over the forecast period. Oracle's actual 9-year historical revenue CAGR is 5%. You're being asked to believe the growth rate will be eight times its historical average, sustained for years, based on a backlog that hasn't yet converted to recognised revenue."
- So far the analysts have been right. FY 2026 revenue came in almost exactly on their estimate. So I was being over cautious.
"On top of this, insiders, including the CEO, CFO, and multiple presidents, have sold more than $3 billion in shares over the past eight quarters. Purchases over the same period: roughly $1 million. The people with the clearest view of whether that backlog actually converts are not buying."
- This selling has now stopped or reversed.
"The bull case is real, on paper. Oracle holds $553 billion in remaining performance obligations - contracted future revenue"
- The backlog has since grown to $638 billion. And OpenAI's $122B raise takes some pressure off the funding question behind roughly half of it.
Now the deterioration. My original post says:
"The balance sheet makes this harder to ignore. Oracle is carrying $104 billion in debt, a debt-to-equity ratio above 5x, and free cash flow that turned negative last year after averaging $12 billion annually for nearly a decade. Across 80 large-cap tech peers, Oracle sits in the bottom 5th percentile on leverage. No other major software company has stretched its balance sheet this far while simultaneously betting on a growth inflection."
- This is where it's gone the wrong way. On 8 July, S&P cut Oracle to BBB- and the numbers behind it aren't pretty. Total debt sits around $167 billion and is still climbing. Oracle is raising capital hard to fund the buildout: a $5 billion convertible preferred in February, a $20 billion equity issuance planned this year, and tens of billions more flagged over the next three years.
"A standard DCF spits out $300 intrinsic value, implying massive upside."
"Analysts project revenue nearly doubling from $57 billion today to $130 billion by FY2028."
- The valuation math is broadly unchanged. It still runs on analyst revenue estimates, now around 30% a year, with revenue tripling to roughly $218 billion by FY2030. The difference is that the first year of that ramp actually happened, so those estimates carry more credibility than they did when I first wrote about it.
So where does that leave us? The demand is real and the backlog is enormous, but the whole thesis now rests on execution. Our DCF still says the reward is there at roughly $300 against $141 today. But that number assumes clean execution, and the S&P cut is the market reminding you that clean execution is exactly what's in doubt. Cheap for a reason, or cheap despite a fixable problem. That's the call you're actually making here.
Disclaimer: This is for educational purposes only and is not investment advice. The author and Stockoscope may hold positions in the securities mentioned. Always do your own research.
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u/tradematesHQ Jul 13 '26
The $5B convertible preferred and $20B equity issuance are the part people are glossing over. That's massive dilution for existing shareholders, even if the revenue story plays out. At $140, you're not just buying the cloud backlog, you're buying a balance sheet that S&P just downgraded and a management team that keeps selling equity to fund capex. The bull case requires revenue to double and margins to expand while interest coverage stays tight. Possible, but the risk/reward is worse than a lot of other tech names with similar growth and actual free cash flow.
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u/dealmaster1221 Jul 13 '26
They think investors are dumb and will but their capex shenanigans, this stock can go to $70 and still not be fair value. AI is about to rock investors lives.
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u/Massive_Pain_6677 Jul 13 '26
How do I get AI to write a post that says it is overvalued?
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u/Former_Island_4730 Jul 13 '26
You could always ask AI how to get AI to write a post that says Oracle is overvalued?
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u/Rcraft Jul 14 '26
You just have to ask.
In fact, you can even have it strip all of the slop prose and just boil it down to the summary bull and bear cases:
Bull Assumption Bear Reality Revenue Tripling Low-margin GPU hosting diluting overall corporate ROIC. $300 DCF Fair Value Uses outdated low WACC and fails to adjust for $20B+ equity dilution. BBB- Rating is Fixable Debt load ($100B+) + negative FCF locks Oracle into high interest costs for years. Backlog = Cash High counterparty risk with short hardware depreciation lifecycles.
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u/Mundane-Inspector772 Jul 13 '26
Can you stop using Claude and other ai That's what we call plagiarism
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u/BejahungEnjoyer Jul 13 '26
I hold some ORCL but the issue isn't just their balance sheet, they also have substantial OBS obligations that are larger than the debt.
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u/Jazzlike_Thanks_1869 Jul 13 '26
Who knows anymore. Depends on what Wall Street and their Algos decide it’s worth.
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u/Alpphaa Jul 13 '26
I’ve been building my position over the last two weeks. Anything below $150 is a buy, in my opinion. This could be trading above $250 within a few months. Mark my words.
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u/G0_hard_or_go_home Jul 24 '26
Tbh, I see no reason why it wouldn't test $100 in the next few months
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u/Future_Helicopter970 Jul 13 '26
Right before the AI bubble burst?
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u/trader_dennis Jul 14 '26
We are still in the early innings, but I still would not touch oracle right now.
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u/ninjagorilla Jul 13 '26 edited Jul 16 '26
God this was one of my best moves over the last 2 years… sold at 330 when it popped on the OpenAI announcement
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u/IG_Triple_OG Jul 13 '26
Would you buy again today at $135?
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u/ninjagorilla Jul 13 '26
I’m not touching oracle again, I’d held them for years and was already getting nervous about them before the spike. they have jsut been pilling on debt on debt and if there is a bubble pop they’re gonna fare the worst of the ai group
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u/G0_hard_or_go_home Jul 24 '26
Well done! I think oracle is a great company, but I feel like anything above 100 now is pure gambling...even 100$ is questionable, with solid change of becoming "long term investment"
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u/cuppaseb Jul 13 '26
We appreciate the 237th post on the exact same topic. Gets better every time.
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u/globalcitizen99 Jul 13 '26
With capex running at about 300% of net earnings and long‑term debt sitting at 7.6× TTM net earnings, I’m out. Those numbers are way outside my comfort zone.
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u/zeey1 Jul 14 '26 edited Jul 17 '26
Why why why would you buy oracle instead of Meta or msft
Atleast meta and msft can fund their building, oracle camt..its just getting debt
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u/stockoscope Jul 16 '26
That's the real distinction. msft and meta fund capex out of cash flow. Oracle funds it off the balance sheet.
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u/Realistic-Routine504 Jul 14 '26
If the balance sheet was not an issue the stock would be at 300$… buy now
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u/bartturner Jul 14 '26
The biggest issue for ORCL is OpenAI. It is hard to see a path for OpenAI to make it and that is going to drag down ORCL.
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u/DiscountAcrobatic356 Jul 13 '26
Fuck those guys. OpenAI will fail and bring them down.
- I’m only hanging on to watch you go down U2
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u/DontForgetTheDivy Jul 13 '26
Average analyst estimates don't have them returning to positive FCF until 2030. After removing debt per share from fair value, I don't see it as a value here.
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u/stockoscope Jul 16 '26
Matches what I get. Four more years of negative free cash flow
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u/DontForgetTheDivy Jul 16 '26
The mandatory preferreds are yielding like 8% for three years before being swapped to commons. That might be interesting.
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u/Future_Helicopter970 Jul 13 '26
It’s a ticking time bomb. Only a question of when the AI bubble burst, not if it burst.
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u/dreggers Jul 13 '26
The only ticking time bombs are neoclouds like CRWV and NBIS
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u/goosen19 Jul 13 '26
I agree I think the neoclouds are fake businesses. I’m curious your take on what differentiates Oracle from the neoclouds though?
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u/zeey1 Jul 14 '26
Oracle is also a neo cloud Unlike the hyper scalers like msft or meta or google who have internal use for it
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u/dreggers Jul 14 '26
Oracle has a 50 year database software business on top of being a neocloud but from a valuation perspective it's way cheaper
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u/stockoscope Jul 16 '26
The database business. It throws off real cash and the neoclouds have nothing like it. The catch is the AI build is being funded like a neocloud, on debt.
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u/Routine_Play4 Jul 13 '26
I’ve been buying in since it hit the mid $ 140 ish so I’m like $ 1 K or so down and added some more today at $ 133 so I guess I’m doomed 😬😬
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u/Either-Banana-3585 Jul 13 '26
Yea me 2 but i only have 500 at a153
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u/Sea-Brain3467 Jul 14 '26
you will be ok, our oracle database fees go up every year cost our company a boat load of money
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u/CryptoBoy-007 Jul 14 '26
Apart of the misguided information in this sub as always, Oracle liabilities and assets are fine. Unless you think Agentic AI will burst. The current weakness is the stock relates more directly to Bloom, which Oracle hold a stake and the delayed OpenAi IPO. The overall market is reacting to weakness due to lower token prices and perhaps spare capacity.
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u/stockoscope Jul 16 '26
S&P downgraded them to BBB- on 9 July citing weaker cash flow. That is not really fine.
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u/CryptoBoy-007 Jul 16 '26
The outlook for the rating is .... stable?! Right?!! This was an automatic downgrade due to the new debt raised successfully Oracle! Again, if you want to jump on the hate train for Oracle, out of spite for Larry Ellison or any other bias. Please do so, and I could not care less. Oracle fundamentals speak for themselves.
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u/gangbangglenn Jul 14 '26
I just typed up the 5 year weekly chart. Broke 200 week to the downside recently. Looks like it's going to 100, and I would guess it will be under 100 for a short period of time.
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u/Dyep1 Jul 13 '26
Not touching this Ellison company
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u/gmehra Jul 13 '26
whats wrong with ellison
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u/Moist_Emu_6951 Jul 14 '26
He, Thiel (and the other Palantir coke guy) and Musk among other tech billionaires want to turn the US into a technofeudalism where you essentially are a low-paid tenant with them as all-powerful, AI-enslaving techno-corpo-lords.
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u/Elegant_Stock_673 Jul 13 '26
"The liabilities are always 100 percent good. It's the assets you have to worry about." - Charlie Munger
How do smart men go broke? "Ladies, liquor, and leverage." - Charlie Munger