The next five years could be very strong for Oracle (NYSE:ORCL) stock, given that it is well-positioned in AI with a lower regulatory horizon under the Trump administration. The company's earnings are likely to expand due to automation and AI, and its revenue growth is likely to remain steady, heavily supported by Oracle Cloud Infrastructure demand. My valuation model shows a 15% compound annual growth rate likely in its stock price over the next five years in a bull-case outcome, with approximately a fair valuation right now.
Operations & financialsOperationally, there is a lot to be excited about regarding Oracle right now. CEO Larry Ellison was recently invited to speak at a press conference following Trump's inauguration alongside SoftBank (SFTBY) CEO Masayoshi Son and OpenAI CEO Sam Altman on the topic of the $500 billion Stargate project. Arm (NASDAQ:ARM), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Oracle, and OpenAI are the key collaborators on the supercomputer, with SoftBank's CEO acting as the chairman. This supercomputer will have the potential to revolutionize industries across the world, allowing for America to be the leading pioneer in advanced efficient computation. For example, Ellison offered the example of early cancer detection and the potential for a cancer vaccine. This aligns strongly with the technological progress we can look forward to under this new Trump era, often described as the dawn of a new golden age, driven by AI and lower regulations.
On January 20, 2025, Trump rescinded a 2023 executive order issued by former President Joe Biden, which mandated stringent oversight on AI systems that posed risks to national security, public health, or safety. For Oracle, this could mean faster deployment of AI-driven projects, accelerated innovation, and consolidation for Oracle's private sector leadership. However, this contrasts to the stricter regulations we are seeing in the European Union, creating complexities in how the company aligns its potentially fast progress in the United States, where it is headquartered, with foreign restrictions. In addition, it would be remiss to ignore that AI has the potential to be both very beneficial to society and destructive, depending on how it is developed and managed. As such, a lower regulatory environment could provide more room for error in the systems, leading to negative unintended outcomes. In the long term, this could prove damaging to Oracle's market position if it is directly involved in any operational crises related to powerful AI systems deployed at scale. This is why I believe internal safeguards will be more important than ever for Oracle to harness.
The Wall Street consensus currently shows Oracle to be a very strong investment opportunity on the growth front, with a future three-year revenue growth rate of 12.1% compared to a historical 10-year revenue growth rate of 9.4%, and a future three-year earnings per share without non-recurring items growth rate of 13.7%, compared to a historical 10-year earnings per share without non-recurring items growth rate of 8.5%. Given this growth expansion, particularly on the earnings front, an expansion in the company's valuation multiples from their long-term averages is valid.
The company's robust growth prospects are heavily influenced by its position in AI. Oracle Cloud Infrastructure has become a major growth driver, with revenue increasing by around 50% year-over-year in recent quarters. Oracle's remaining performance obligations, a measure of future revenue commitments, has surged by 50% year-over-year to $97 billion, asserting the strong long-term demand for its cloud services. This strong growth is supported by the company's $66 billion Fiscal 2026 revenue forecast, and its ambition of $104 billion in annual revenue for Fiscal 2029. This outlook is heavily influenced by its AI and cloud services growth. Moreover, the company anticipates a 20% annual increase in its earnings per share through Fiscal 2029. This outlook explains why the market is so heavily bullish on the stock right now, though the valuation is certainly rich in light of this.
ValuationOracle has trailing 12-month revenues of $54.9 billion. If this increases at a 13% compound annual growth rate over the next five years based on the operational factors I outlined above (heavily influenced by cloud services growth and broader AI-based tailwinds) the company will have $101.1 billion in revenue in January 2030. At a net margin of 23.5% that has expanded somewhat due to automation-based benefits from AI, the company will have a net income of $23.76 billion. This net margin should also be aided by lower capital expenditures and a higher return on investment from its AI-based data center investments at the time, allowing for more free cash flow to support operational efficiencies.
The compound annual decline rate in the company's basic average shares outstanding is -5.5% over the past five years. If this trend continues, the company will have a basic average share count of 2.1 billion in January 2030. Therefore, I forecast that the company will have a basic earnings per share of $11.31.
The company's price-to-earnings ratio is currently 45. While a higher multiple is valid right now due to strong future growth prospects, this is likely too high to sustain given that the company has a 10-year median price-to-earnings ratio of just 21 and a five-year median of 28.5. I will use the midpoint of its 10-year median and current price-to-earnings ratios to be conservative; this also accounts for expanded sentiment due to stronger growth in the medium-term horizon due to AI and lower regulations. At a price-to-earnings ratio of 32.5, Oracle will have a stock price of $370 in January 2030. The current stock price is $185, so my forecast indicates a 15% compound annual growth rate over the time period. This reveals Oracle is a valid medium-term investment in a bull-case outcome.
Oracle's cost of equity is 13.4%, based on a risk-free rate of return of 4.6% (10-Year Treasury Constant Maturity Rate), plus Oracle's beta of 1.47, multiplied by the GuruFocus market premium of 6%. When discounting back my January 2030 price target for Oracle to the present day using the company's current cost of equity as the discount rate, the present intrinsic stock value is $197.30. Therefore, Oracle stock is approximately fairly valued based on my five-year model.
RisksIt is necessary to look at the aspects of this thesis which could result in a base-case, or bear-case outcome, where Oracle stock appreciates more moderately in price over the next five years.
Given that the AI market is both heavily competitive and there are risks with lower regulations related to Oracle's AI systems being used in sensitive fields like healthcare or finance, any severe errors Oracle's AI systems show could significantly reduce investor sentiment for the stock; the current valuation multiple of 45 could be deemed far too high by the market, as could my terminal multiple of 32.5. In addition, if we do not have a continuous line of relaxed regulatory policy in the United States following the Trump administration (for example, due to a Democrat victory at the next election), the current exuberance for Oracle stock could be short-lived.
Moreover, as the AI arms race continues, there is the risk that Oracle will overspend toward the peak of the infrastructure build-out in the next few years. If it builds too many data centers too soon, it could find the return on investment of these is slower than expected. In addition, the demand for AI may taper in five years or so, especially if macroeconomic conditions do not improve under the new federal Department of Government Efficiency, as is currently widely expected. I consider the probability of macroeconomic success in the United States to be high under Trump's second term, but the risk of moderate results still needs to be understood to approach valuing Big Tech companies like Oracle with a conservative realism.
ConclusionOracle is at an exciting point in its history where it has positioned itself as a leader in AI. Therefore, the company's cloud services are likely to grow robustly in the next few years, with solid revenue growth and expansive earnings, aided by a likely improved net margin from a tapering of capital expenditures related to data centers by January 2030, as well as automation benefits. In my bull-case valuation model, Oracle stock will reach $370 in price by January 2030, implying a 15% compound annual growth rate from the present price of $185. In addition, my model shows that the stock is approximately fairly valued right now.
This content was originally published on Gurufocus.com
