Oracle's Q4 Results Were Mediocre; FY27 Guidance Offered No Surprises

Overview

In a research report published on June 11, 2026, Morgan Stanley reviewed Oracle Corporation's (ORCL.US) fourth-quarter fiscal year 2026 earnings. The report argues that Oracle's Q4 results overall fell short of investor expectations. Although cloud infrastructure revenue growth further accelerated to 93%, both cloud applications and cloud database growth decelerated. The company's FY27 guidance remained largely unchanged, reaffirming revenue of $90 billion and slightly adjusting EPS from $8.00 to $8.05, while gross capital expenditure guidance came in high at $90-95 billion, exceeding market expectations. Morgan Stanley maintains its "Equal-weight" rating and $207 target price, believing that during the peak phase of the GPUaaS investment cycle, near-term stock price upside is limited, making it more difficult for the market to build confidence in its ambitious long-term goals.

Core views

Q4 (ended May 2026) results were generally flat. Cloud infrastructure revenue was approximately $5.8 billion, with YoY growth accelerating further from the higher level in Q3 to 93%. However, Cloud Applications revenue growth decelerated to 9% (YoY, constant currency), with Fusion applications slowing from 17% in Q3 to 12%, and NetSuite from 14% to 9%, both facing tougher year-over-year comparisons. Cloud database growth also slowed from 35% to 29%. Total cloud revenue growth was approximately 46% (constant currency), near the midpoint of the guidance range, with total revenue beating market expectations by only about 50 basis points. Profitability improved: Non-GAAP gross margin rose sequentially to 66.3%, though still down 500 basis points YoY; Non-GAAP operating margin increased both sequentially and YoY to 44.8%, primarily driven by efficiency initiatives taken during the quarter, pushing EPS about 7% above market expectations. FY27 guidance lacks upward potential. The company reaffirmed FY27 revenue of $90 billion, raising EPS guidance by only $0.05 to $8.05 from the $8.00 set at Analyst Day (October 2025), essentially unchanged. Although revenue has been raised by about 5% since Analyst Day, EPS has barely moved, indicating significant pressure on gross margins from data center capacity ramp-up. Gross capital expenditure guidance of $90-95 billion (net cash outlay of approximately $70 billion) represents about 100% of FY27 revenue, significantly higher than the market expectation of $72 billion. RPO grew significantly but with a unique structure. RPO reached $638 billion at the end of Q4, an increase of $85 billion QoQ and 363% YoY, implying total bookings of approximately $104 billion for the quarter. However, the report notes that most of the RPO growth stemmed from pre-pay and "Bring Your Own Hardware" (BYOH) contract structures, whose share rose from about 5% ($29 billion) in Q3 to about 12% ($75 billion). Management believes these structures do not erode margins, with project-level ROIC reaching the 25-30% range. The GPUaaS investment cycle is entering its peak phase. The company added 1.2 GW of new data center capacity in full-year FY26, with 98% of capacity already contracted, and AI infrastructure utilization at approximately 97.5%. Nearly 1 GW more is expected in Q1 (FY27). However, the report points out that a key challenge for the company in assessing capital intensity is the rapid growth in lease commitments—the $261 billion in unstarted lease liabilities disclosed in Q3 are expected to be recorded on the balance sheet between FY26-FY28, which may serve as the primary funding source for its 10+ GW target.

Analysis framework

Morgan Stanley employs a top-down framework to comprehensively evaluate Oracle's latest earnings. First, the report compares Q4 actual results against market expectations to identify key items that beat or missed estimates (cloud infrastructure growth rate, cloud application deceleration, margin changes, degree of EPS beat, etc.). Second, it compares FY27 guidance against the long-term targets set at Analyst Day (October 2025) to assess whether management has adjusted long-term goals and to understand the implied revenue growth, margin pressure, and capital expenditure intensity within the guidance. Third, it details the structural changes in RPO, distinguishing the contribution of traditional contracts versus new structures like pre-pay/BYOH to RPO growth, thereby assessing the sustainability of order quality. Fourth, it quantifies potential stock price upside under different assumptions through risk-reward scenario analysis (Bull/Base/Bear), deriving the $207 target price using a ~25x multiple on FY28 Non-GAAP EPS ($8.28) in the base case. Finally, the report lists several observation points to track (CAPEX exceeding expectations, limited EPS upside, cloud application deceleration, lease commitments, etc.) to guide investors toward subsequent key milestones.

Methodology notes

• Valuation MethodPE/PEG valuation

  The report uses the Price-to-Earnings (P/E) valuation method to price the company

  The report derives a target price of $207 by applying a ~25x P/E multiple to FY28 Non-GAAP EPS of approximately $8.28. This 25x multiple represents a premium over Oracle's ~20x average over the past five years, justified by potential accelerated growth in fiscal years 2029-2030. This is a common valuation method for growth stocks: the current high multiple reflects anticipated future high growth.

• Valuation MethodSOTP Sum-of-the-Parts Valuation

  Sum-of-the-parts (SOTP) valuation used in the bull case

  In the bull case scenario, the report values the company's core businesses (legacy software, cloud services) separately from the GPUaaS business, assuming different revenue scales and margins for each, then discounts them using the weighted average cost of capital before summing them up. This segment-based valuation approach is suitable for companies with diversified business structures and varying growth prospects across segments.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Data Center Capacity Supply-Demand Analysis

  The report evaluates the supply-demand match for Oracle's GPUaaS business from two angles: supply (data center capacity expansion, lease commitments) and demand (98% capacity contracted, AI infrastructure utilization ~97.5%). This framework helps determine whether supply will be excessive or insufficient and whether pricing power is sustainable.

• Cycle and Sentiment FrameworkSentiment Inflection Point Analysis

  Investment Cycle Inflection Point Analysis: Peak Phase of GPUaaS Investment

  The report notes that Oracle is entering and advancing through the peak phase of the GPUaaS investment cycle, a stage characterized by rapidly rising capital expenditures and lease obligations, pressured gross margins, and investors focusing more on short-term execution than long-term goals. This is typical logic for sentiment inflection point analysis—high investment periods often mean short-term profit pressure but may lay the foundation for future growth.

• Financial Industry Specific Metrics

  Project-Level ROIC (Return on Invested Capital) Analysis

  Management mentioned on the conference call that project-level steady-state ROIC for pre-pay/BYOH contracts can reach 25-30% (high 20s), and BYOH structures may yield even higher ROIC. This method evaluates return on investment at the project level, differing from corporate-wide ROIC, and better reflects the efficiency of specific business lines. The report cites this data to argue that these non-traditional contracts do not erode margins.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Oracle Corporation (ORCL.US)

  Subject of analysis, evaluating the impact of its Q4 results and FY27 guidance on stock price

  Strengths

  Cloud infrastructure revenue accelerated to 93% growth; RPO of $638 billion provides long-term revenue visibility; data center capacity is highly contracted with high utilization; reaffirmed long-term financial targets (FY30 Revenue CAGR 31%, EPS CAGR 28%); effective control of operating expenses

  Weaknesses

  Cloud application growth decelerated to 9%, with Fusion and NetSuite growth both slowing; cloud database growth slowed from 35% to 29%; FY27 EPS guidance saw almost no increase; capital expenditures far exceed market expectations, creating significant financing pressure; gross margins still declined YoY

  Risks

  Uncertainty regarding the scale and timing of the GPUaaS investment cycle; increasing balance sheet pressure due to capital expenditures and lease obligations; uncertainty over whether cloud application and database businesses can re-accelerate; long-term sustainability of the economics of pre-pay/BYOH contracts

Key data

• Q4 Cloud Infrastructure Revenue$5.8 BillionYoY growth of 93% (accelerating), the most positive signal of the quarter
• Q4 Non-GAAP Gross Margin66.3%Improved sequentially, but down 500 basis points YoY
• Q4 Non-GAAP Operating Margin44.8%Increased both sequentially and YoY, benefiting from efficiency measures in the quarter
• Q4 EPS (Non-GAAP) Beat Magnitude~7%EPS exceeded market consensus expectations by approximately 7%
• FY27 Revenue Guidance$90 BillionReaffirmed Analyst Day target, consistent with previous guidance
• FY27 EPS Guidance$8.05Raised only by $0.05 from the $8.00 at Analyst Day, essentially unchanged
• FY27 Gross Capex Guidance$90-95 BillionNet cash outlay ~$70 billion, representing ~100% of FY27 revenue, higher than market expectations
• RPO (Remaining Performance Obligations)$638 BillionUp $85 billion QoQ, up 363% YoY, but mostly from pre-pay/BYOH structures
• Pre-pay/BYOH Contracts as % of RPO12% (~$75 Billion)Only 5% (~$29 billion) last quarter, growing rapidly
• AI Infrastructure Utilization in Data Centers~97.5%98% of capacity contracted, very high utilization

Impact & implications

The report believes that the messages conveyed by Oracle's Q4 results and FY27 guidance are mixed. On the positive side: cloud infrastructure revenue continues to accelerate, RPO has grown significantly, and data center capacity is highly contracted with utilization near full capacity, indicating strong GPUaaS demand. However, there are several concerning signals: cloud application and cloud database growth have slowed, suggesting non-AI cloud businesses have not yet entered an acceleration phase; FY27 guidance shows revenue raised but EPS nearly static, indicating that the investment cycle's erosion of margins has exceeded expectations; capital expenditure plans are far above market consensus, with funding relying on additional financing (planning to refinance $40 billion in FY27, having already raised $20 billion via ATM programs). Overall, given that the stock price has risen more than 30% since Q3, current valuation levels imply high optimism for long-term goals, while short-term results lack catalysts for upward revision, leading to a balanced risk-reward profile. Morgan Stanley maintains its Equal-weight rating, believing that further upside at current price levels is limited.

Risks

• OCI (Oracle Cloud Infrastructure) capacity ramp-up falls short of expectations
• OCI gross margins lower than expected
• Significant leverage burden from GPUaaS investments
• Disruptive technologies emerging in the data management market
• Slower-than-expected adoption of Fusion applications and cloud databases within the installed base

What to watch

• Actual execution of FY27 capital expenditures and cash flow structure (gross vs. net)
• Whether the economics of pre-pay/BYOH contracts remain sustainable without eroding margins
• Whether cloud applications and cloud databases can return to an accelerated growth trajectory
• Disclosure of lease commitments in the latest 10-K filing to assess capital intensity
• Whether multi-cloud database growth can support the 40%+ growth target set at Analyst Day
• Specific timing and utilization status of new data center capacity additions