Oracle's AI Backlog Sets Up 50% Upside, Despite Falling Stock Price

Oracle's recent earnings report was a blowout quarter in enterprise software history, with revenue up 29.6% year over year and cloud infrastructure growing 121%. However, despite this impressive performance, the stock price has fallen 8.95% in the past week.

The disconnect between Oracle's strong financials and its falling stock price is attributed to investors focusing on the company's negative $5.396 billion quarterly free cash flow and $28.499 billion capex bill, while ignoring the massive AI backlog.

According to 24/7 Wall St., Oracle's remaining performance obligations (RPO) have swelled to $664 billion, with over $30 billion in new AI contracts booked in the quarter alone. Bulls argue that half of this RPO will convert to revenue over the next 36 months, which would drive Oracle's revenue to at least $90 billion and non-GAAP EPS to $8.10.

The consensus analyst target of $239 supports this view, with 8 Strong Buys and 28 Buys backing Oracle's potential for growth. The bear case, however, hinges on a cash math problem, where a slip in data-center delivery timing or AI compute pricing could push RPO conversion out.

Despite these risks, Oracle appears cheaper than its peers Microsoft and Alphabet, with a forward P/E of 17 compared to their respective ratios of 26 and 22. With our 24/7 Wall St. price target of $214.69 implying roughly 50% upside over the next 12 months, we recommend buying Oracle stock.