BofA Maintains Buy Rating on Oracle, Raises Target Price to $240

Overview

BofA Securities released a preview report for Oracle's FY2026 Q4 earnings, maintaining a 'Buy' rating on the company and raising its target price from $200 to $240. The report's core thesis is that Oracle is successfully converting its substantial backlog into revenue, with demand for Oracle Cloud Infrastructure (OCI) showing a step-change increase, while the core database business remains resilient. Although aggressive data center construction has led to elevated short-term capital expenditures and pressure on free cash flow, the firm believes this is necessary to capture long-term share in the AI infrastructure market, justifying the current valuation premium.

Core views

Accelerating Cloud Growth and Margin Focus: The report forecasts Oracle Cloud PaaS/IaaS revenue will achieve 94% YoY growth in FY26 Q4, accelerating further from the 84% growth in the prior quarter, primarily driven by new data center capacity coming online and recognition of Remaining Performance Obligations (RPO). As cloud revenue contribution rises to 52% (from 44% a year ago), margins and new compute contracts have become key focal points. The model predicts cloud and software gross margins will remain around 70%, with overall gross margin at approximately 67%. Notably, OpenAI accounts for over 50% of the company's RPO, making its fulfillment capability and financial condition critical variables. Elevated Capex and Financing Needs: To meet backlog and compute demand, Oracle continues to ramp up data center investments. The report forecasts FY26 Q4 capex at $11 billion and full-year FY27 capex at $68.3 billion, representing YoY growth of 21% and 36%, respectively. Given the capital-intensive nature of construction, beyond the announced $20 billion ATM equity program, the company may need to raise an additional ~$35 billion in funding over the coming years. While this high-intensity investment supports long-term growth, it directly causes short-term free cash flow to turn negative, with FY26 Q4 FCF projected at -$2.6 billion. Core Business Resilience and Valuation Logic: The traditional core database business continues to provide a stable foundation, with FY26 Q3 revenue growing 35% YoY; notably, multicloud database revenue surged 531%, reinforced by strategic partnerships with Amazon and Google that strengthen ecosystem expansion. Despite the strength in core business, it remains insufficient to fully offset the negative cash flow impact of high capex. Regarding valuation, the target price increase to $240 is based on a 26.5x P/E multiple applied to CY27E EPS, commanding a premium over the 19x average for large-cap software and cloud data center peers, justified by Oracle's superior growth trajectory and accumulating order backlog.

Analysis framework

The report employs a typical 'growth-oriented heavy-asset transformation' analytical framework. First, it validates the authenticity of cloud business demand by tracking the conversion rate of Remaining Performance Obligations (RPO) into revenue, paying particular attention to concentration risk among top customers (e.g., OpenAI). Second, it treats capital expenditure as a forward-looking indicator rather than merely a financial burden, assessing whether the company can sustain its aggressive build-out pace without compromising balance sheet safety by analyzing the flexibility of financing channels (debt, equity, ATM). Finally, regarding valuation, it uses relative valuation (P/E), assigning a higher multiple than peers to reflect differentiated growth in the AI infrastructure space, while incorporating the cash-generating capability of the legacy core business as a safety cushion for comprehensive pricing.

Methodology notes

• Company Fundamentals & Financial FrameworkFree cash flow analysis

  Temporary Distortion of FCF During Heavy-Asset Transformation

  When a company transitions from an asset-light software model to an asset-heavy cloud infrastructure model, massive capital expenditures cause Free Cash Flow (FCF) to turn significantly negative in the short term. When analyzing such companies, value should not be judged solely by current-period FCF; instead, focus should be placed on whether capex corresponds to clear order backlogs (Backlog/RPO) and future revenue conversion capabilities.

• Valuation MethodologyPE/PEG valuation

  High-Growth Premium Pricing Based on Forward Earnings

  For companies in an accelerated growth phase, analysts often use Forward EPS (next one or two years) multiplied by a target P/E ratio for valuation. When a company's growth rate significantly exceeds that of its peers, a valuation premium relative to the industry average can be assigned. This report applies a 26.5x P/E based on CY27E EPS, above the peer average of 19x.

• Industry/Sector Analysis FrameworkSupply-demand framework

  RPO as a Leading Demand Indicator

  Remaining Performance Obligations (RPO) represent contracted but unrecognized revenue and are a core leading indicator for measuring future demand certainty in the SaaS and cloud infrastructure industries. Rapid growth in RPO typically signals accelerated revenue release in subsequent quarters, reflecting true market demand momentum better than current-period revenue.

Asset mapping & comparison

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

• Oracle Corporation (ORCL.US)

  Core Beneficiary: Explosion in AI infrastructure demand drives cloud business acceleration; sufficient order backlog ensures medium-term growth visibility.

  Strengths

  Accelerating cloud revenue growth (94% YoY); resilient core database business with deepening multicloud partnerships; massive RPO scale with clear conversion path.

  Weaknesses

  Extremely high capex intensity causing short-term negative free cash flow; excessive reliance on a single mega-customer (OpenAI); persistent financing needs.

  Comparison

  Valuation (26.5x CY27E P/E) is above the average for large-cap software and cloud data center peers (19x); premium stems from higher growth expectations and order accumulation.

  Risks

  Delays in data center construction; decline in enterprise software spending; FX headwinds; terminal value pressure on software business from innovative AI labs.

Key data

• FY26 Q4E Cloud PaaS/IaaS Revenue Growth+94% YoYAccelerated further from 84% in FY26 Q3, benefiting from new capacity coming online
• FY27E Capital Expenditure$68.3 BillionUp 36% YoY, allocated to data center construction to fulfill backlog
• FY26 Q4E Free Cash Flow-$2.6 BillionMargin at -13.4%, dragged down by high capital expenditures
• OpenAI Share of RPO>50%High customer concentration; requires close monitoring of fulfillment and financing capabilities
• Target Price Valuation Basis26.5x CY27E P/ERaised from previous 22x; above peer average of 19x

Impact & implications

The report suggests Oracle is in a critical window to convert its massive order backlog into actual revenue, with the step-change increase in cloud infrastructure demand validating its competitiveness in the AI era. Although high capital expenditures will suppress free cash flow performance in the short term, this is viewed as a necessary investment to secure long-term market share. For investors, this implies a need to tolerate short-term financial statement volatility and instead focus on cloud revenue growth rates, RPO conversion efficiency, and execution of financing plans. The target price hike reflects the institution's increased confidence in this strategy of trading short-term metrics for long-term gains.

Risks

• Data center construction progress falling short of expectations, impacting revenue recognition cadence
• Cyclical downturn or weak demand in enterprise software spending
• Negative impact of currency fluctuations on multinational business revenue
• Innovative AI labs potentially pressuring the long-term terminal value of the traditional software business
• Failure of key major customers (e.g., OpenAI) to meet revenue targets or secure financing, severely impacting RPO conversion

What to watch

• Latest guidance in FY26 Q4 earnings regarding data center construction progress and revenue recognition cadence
• Management commentary on the $20 billion ATM equity program and subsequent financing needs
• Changes in cloud business gross margins and signing of new compute contracts
• Fulfillment progress of key customers like OpenAI and their own capital access capabilities
• Sustained growth momentum of the core database business in multicloud environments