Oracle Stock Falls Despite ‘Very Strong Outlook.’ Here’s Why.

oracle (ORCL) executives presented ambitious new long-term revenue and earnings targets late Thursday in a meeting with analysts. But Oracle shares fell on Friday.

Oracle expects its total revenue to grow at a rate of 31% annually over the next five years. The company could reach $225 billion in sales by its fiscal 2030, executives told analysts late Thursday. The tech giant also expects its earnings to rise to $21 per share by fiscal 2030, an average growth of 28% year over year.

The forecast underscores the momentum pushing the 47-year-old database software giant toward its best year on the stock market this century. Oracle shares rose more than 85% ahead of the AI ​​World conference in Las Vegas. The company provided the forecast at the Analyst Day event that concluded the conference.

John DiVucci, an analyst at Guggenheim, wrote that the event underscored the “tremendous opportunity that lies ahead for Oracle,” which is led by deals to train AI systems for its cloud infrastructure business.

Oracle’s profits rose earlier

“More importantly, the company presented growth and margin profiles across the various components of its IaaS (infrastructure as a service) revenue where it was highlighted that AI infrastructure deals have gross margins of 30% to 40% over the life of the contract, which is significantly higher than some had expected,” DiFucci wrote. He reiterated his “best idea” forecast for Oracle stock and raised his price target to 400 from 375.

The Analyst Day event comes about a month after Oracle shares rose following its fiscal first-quarter report. The tech giant reported a backlog of $455 billion in contracted revenue. This gain was due to higher demand for Oracle Cloud Infrastructure business.

Barclays analyst Raimo Lencho said fiscal 2030 revenue forecasts were higher than Wall Street expectations. These expectations “actually increased sharply after the first-quarter results in September,” he said. Lencho reiterated the call to overweight, or buy, raising his price target to 400 from 367.

Question about the cost of Oracle’s AI

Despite positive analyst reviews, Oracle stock fell more than 8% to 287.76 on the stock market today. Shares fell below Oracle’s 21-day moving average.

While the event provided a bullish long-term outlook, Oracle did not provide further details on its capital expenditure plans, Jefferies analyst Brent Thiel noted.

“Questions remain about Oracle’s capex requirements to meet increased demand, as there was no forward-looking comment on capex on the analysis day,” Thiel wrote to clients on Thursday. “Capital expenditures will need to increase in line with OCI’s revenue growth, raising concerns about Oracle’s financing options to support this expansion.”

Oracle must scale its data center infrastructure to meet AI cloud demand. Analysts expect Oracle to have negative free cash flow totaling more than $26 billion over its next three fiscal years, according to FactSet analyst estimates. Oracle raised $18 billion by selling corporate bonds last month. Investors expect the company will likely need more debt to fund its AI ambitions.

Are investors gaining confidence in management?

“Looking ahead, (Oracle) stock will likely consolidate recent gains in the coming quarters as investors digest the recent news flow and feel comfortable with management’s ability to deliver strong operating income growth even as the shift to a capital-focused business model changes the current margin profile,” Stifel analyst Brad Reback wrote on Friday.

Reback reiterated a buy call and 350 price target for Oracle stock. Jefferies Thill also reiterated the buy call and raised the price target to 400 from 360.

Guggenheim’s DiFucci added that financing Oracle’s capex needs likely was not addressed at the event because the company’s decision on how to raise financing could take a year or more.

“But we believe the company’s profitability profile will be very similar regardless of whether they pursue all debt, seller financing, or even an equity raise,” the analyst wrote.

High expectations for oracle stock

Meanwhile, Oracle addressed another ongoing concern for investors: its reliance on OpenAI. Much of Oracle’s revenue backlog is due to its growing partnership with the startup behind ChatGPT, including a $300 billion cloud contract.

“I know people sometimes wonder, ‘Is this just OpenAI?'” Oracle co-CEO Clay McGuirk said at the analyst meeting, according to a FactSet transcript. “The truth is, we think OpenAI is a great customer, but we have too many customers.”

McGuirk, who took over as co-CEO last month, said Oracle has booked seven cloud deals from four different customers worth $65 billion since the start of its fiscal second quarter ending in November. This includes a deal with a parent on Facebook Meta platforms (dead).

Evercore ISI analyst Kirk Mattern wrote that the event showed that Oracle is “firing on all cylinders.” He raised his price target on Oracle stock to 385 from 350 while repeating an outperform call in a note to clients on Friday.

However, Oracle stock has actually risen nearly 30% since Oracle’s fiscal first-quarter report last month.

“Expectations were high leading up to the event, which helps explain the somewhat muted reaction to the very strong forecast,” Mattern said.

You may also like:

DoorDash partners with Waymo for robot food delivery

Best Growth Stocks to Buy and Watch

Learn how to time the market with IBD’s ETF market strategy

Find the best long-term investments with IBD’s long-term leaders

AI shopping is about to turn e-commerce on its head. What it means for Amazon, Walmart, Meta, and Google.