Oracle's Cloud Business (OCI) Continues to Accelerate, Buy Rating Reiterated

Overview

This Deutsche Bank research report provides a preview analysis of Oracle's (Oracle) release of its FY26 fourth quarter (F4Q) and new fiscal year (FY27) earnings. The core conclusion is that Oracle is at a turning point in its cloud infrastructure (OCI) investment cycle. Its OCI business continues to show strong acceleration, and execution capability is seen as key to unlocking long-term value. Despite substantial capital investment causing short-term pressure on profitability and cash flow, institutional sentiment remains optimistic, with a reiteration of the 'buy' rating and a $300 target price.

Core views

The report offers detailed forecasts for Oracle's fourth quarter performance. Total revenue is expected to reach $19.09 billion, up 20.0% year-over-year, in line with market expectations. Growth is almost entirely driven by cloud business. Within cloud services, the most closely watched Infrastructure as a Service (IaaS) OCI segment is expected to generate revenue growth of 89% year-over-year (at fixed exchange rates), marking the fifth consecutive quarter of acceleration. The key basis for this prediction comes from management's disclosure of capacity delivery pace—expected to exceed last quarter's record of around 400MW, indicating that the company is progressing according to plan. The report acknowledges that the exact timing of new capacity converting into revenue is the biggest variable this quarter, difficult to predict precisely due to limited external visibility. Beyond OCI, the report also sets expectations for other business segments: Database Cloud Services (Cloud DB) is expected to maintain approximately 30% year-over-year growth over the past four quarters; SaaS business is estimated to grow 11% (at fixed exchange rates), maintaining stability; traditional software support revenue is expected to remain flat. Looking ahead to the new fiscal year (FY27), the report believes achieving the management-provided $90 billion total revenue guidance (approximately 33% YoY growth) hinges heavily on OCI execution. Institutional forecasts predict OCI revenue of $35 billion (up 94% YoY), slightly above the official guidance of $34 billion from the end of the previous fiscal year but below the market consensus of $38 billion. The report notes that OCI demand is robust (signed but unfulfilled contracts surged over 60% YoY in Q3 of this fiscal year), but given the massive scale required to double from a $18 billion base and the supply chain challenges involved, a conservative stance is prudent. On profitability, the report presents a balanced view. On one hand, rapid shift toward high-growth but initially low-profit businesses such as AI OCI is expected to compress non-GAAP gross margins and operating margins. On the other hand, leverage in operating expenses (benefiting from internal AI applications, sales team restructuring, and large cloud transaction economies of scale) will offset some of the gross margin pressure. For FY27, the report expects further margin compression to be partially offset by a 5 percentage point decline in operating expense-to-revenue ratio, enabling operating profit growth to accelerate from approximately 15% YoY in FY26 to around 20% YoY in FY27.

Analysis framework

The analysis revolves around Oracle's core theme of 'cloud transformation,' employing a layered deconstruction approach. First, it identifies OCI as the primary growth driver, building its forecast on hard metrics like 'capacity delivery,' tracking historical delivery volumes (e.g., last quarter’s 400MW), management’s latest guidance, and global customer availability expansion plans to model incremental revenue quarterly and annually. Secondly, the analysis does not isolate OCI but places it within Oracle’s overall business matrix: assessing the sustainability of high-margin SaaS and Cloud DB as secondary growth engines, monitoring the decline rate of traditional software licensing (License) and hardware (HW) during their transition to cloud subscription models. This multi-dimensional modeling is supported by 'bottom-up, segmented analysis.' Finally, the report focuses income and profit forecasts on cash flow and valuation. It particularly emphasizes capital expenditure (CapEx) as a key observation indicator, and based on its projected OCI revenue increments and component price increases, it judges that market consensus CapEx estimates ($69 billion) may be significantly underestimated, with the institution’s $85 billion forecast even carrying upside risk. The final valuation conclusion ($300 target price) stems from a DCF cash flow discounting model, aligning with its judgment on long-term growth and cash recovery.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  The report uses a DCF (Discounted Cash Flow Model) to derive the target price.

  DCF is a method of evaluating a company's intrinsic value by forecasting its future free cash flows and discounting them back to present value using an appropriate discount rate. In this case, the target price of $300 was calculated via DCF, indicating that the bullish outlook is based on expectations of the company's long-term cash generation capability.

• Company Fundamentals and Financial FrameworkOthers

  Segment Valuation / Bottom-Up Forecasting

  The report breaks down Oracle's revenue into multiple business segments including cloud services (IaaS/SaaS), software licensing, software support, hardware, and services, each modeled and forecasted independently before summing to total financial projections. This method helps clearly identify each business's growth drivers and margin changes, making it an effective tool for analyzing companies in a cloud transformation phase.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  The report pays special attention to both the supply side (capacity delivery) and demand side (contract backlog, customer delivery timelines) of cloud infrastructure (OCI).

  For capital-intensive cloud infrastructure businesses, the core contradiction often lies in matching supply and demand. This article extensively analyzes Oracle's capacity delivery progress (MWs, number of customer-available regions) and the strength of demand (large deals, contract requirements, delivery cycles), as these directly determine revenue growth and the feasibility of guidance.

Key data

• F4Q26 OCI Cloud Business Expected Growth Rate+89%Year-over-year growth (at fixed exchange rates), Deutsche Bank forecast, market consensus is +92%.
• F3Q Capacity Delivery Volume~400 MWCapacity delivered to customers in the previous quarter. Management expects F4Q delivery volume to exceed this level.
• FY27 Revenue Guidance$90 BillionCompany's next fiscal year total revenue target, with YoY growth over 30%.
• FY27 OCI Revenue Forecast$350 Billion (DBe) - $380 Billion (Cons.)Deutsche Bank forecasts $35 billion (+94%), market consensus (Cons) is $38 billion. Company's previous guidance was at least $34 billion.
• FY27 Capital Expenditure (CapEx) Forecast$850 Billion (DBe) - $690 Billion (Cons.)Deutsche Bank forecasts approximately $85 billion, significantly higher than market consensus of $69 billion.
• FY27 Operating Profit Growth Forecast~20% YoYDeutsche Bank forecasts operating profit growth to accelerate from approximately 15% YoY in FY26 to around 20% YoY in FY27.
• Current Rating and Target PriceBuy / $300Based on DCF valuation model, reiterating the 'buy' rating.

Impact & implications

The report suggests that Oracle is entering a critical investment cycle, where massive capital expenditures are used to expand AI cloud infrastructure. While this may temporarily suppress profitability and free cash flow over the next few years, institutions hold a positive view. The rationale is that they believe Oracle's vast contract backlog (cRPO) in AI infrastructure will convert into a high-value business, complementing its core OCI, cloud database, and application software businesses, thus creating sufficient long-term return potential to justify the current investment cycle.

Risks

• Supply Chain Challenges: OCI revenue targets depend on timely capacity delivery, which is constrained by components, labor, and other supply chain factors outside Oracle's full control.
• Surging Capital Expenditure: Oracle plans to increase capital spending while maintaining high revenue growth, placing greater demands on cash flow management and financing capabilities.
• Short-Term Margin Pressure: The investment cycle (e.g., pre-revenue costs during capacity ramp-up) could lead to underestimation of reported margin data, affecting short-term market sentiment.

What to watch

• Quarterly Earnings Release: Key indicators include whether OCI achieves near 90% YoY growth and continuous acceleration, along with linear growth trends across business segments.
• Updated Official Guidance for FY27: Any changes may reflect the company's updated assessment of supply chain and capacity delivery capabilities.
• New CFO’s Capital Plan: Market will watch for initial thoughts from new Chief Financial Officer (CFO) Hilary Maxson on how to fund future construction and leveraged plans.
• Composition and Financing Structure of New AI Deals: Observing whether large transactions increasingly adopt lighter-capital tools like BYOC-HW to manage balance sheets.
• Capital Expenditure Guidance: The earnings report may provide FY27 CapEx guidance, serving as a key validation point for the institution's above-consensus predictions.