Oracle's stock could pack 30% more upside as these investor worries fade away

By Emily Bary

Oracle's stock heads for best five-day run since 2001 as an analyst says recent developments alleviate fears on margins and free cash flow

Oracle Corp.'s stock is having itself a rally.

The software and database stock is up for the fifth session in a row on Monday, and it ranks second among S&P 500 index SPX gainers on the day with its 5.8% rise. The latest positive catalyst: An upgrade from Melius Research analyst Ben Reitzes.

Shares of Oracle are up 22.6% across the past five trading days and on pace for their best five-session rally since the period that ended April 20, 2001, when they rose 24.8%, according to Dow Jones Market Data.

Reitzes knows how it might look for him to be upgrading Oracle shares (ORCL) after they had risen 54% on the year through Friday's close, but he also said you could view the stock's setup another way. "You could say we are late...but we could be just in the middle of a move," he wrote.

He's upbeat about Oracle's multicloud partnerships with other industry players, as well as founder Larry Ellison's "celebrity status."

"Sure, being a persuasive tech leader does have its privileges - it can help you get [graphics processing units], it can get you agreements with all the cloud CEOs and being a close friend of (customer) Elon Musk doesn't hurt," Reitzes wrote.

Oracle has been striking deals with Amazon.com Inc. (AMZN) and other cloud players, which Reitzes thinks could help the business in numerous ways. "These 'multicloud' deals are higher margin than the Oracle Cloud (OCI) average - and offset a large portion of the mix shift...that seemed heavily dilutive to margins," he wrote.

Plus, the arrangements could help Oracle's overall growth.

Reitzes previously worried about Oracle's status as a "cash guzzler," especially relative to other technology companies that boast more favorable balances of free cash flow relative to net income. Now, he's changing his tune a bit on the extent to which this dynamic could weigh on sentiment.

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"While the observation is correct - it doesn't mean the investors will care, if Oracle's top line is accelerating toward the mid-teens," he wrote. "We can't sit here and dwell on free cash flow but these investments are making Oracle a cloud giant with a real place in the training and inferencing of AI models."

The upgrade comes on the heels of Oracle's better-than-expected report for the fiscal first quarter and its upbeat long-term outlook delivered at last week's analyst day. "Accelerating revenue growth of this mega-cap should rewarded over the long-term," according to Reitzes.

He thinks the company is approaching $8.50 of earnings-per-share run rate by two years from now, "and with our biggest worries muted, we find it hard not to put a 25x multiple on a company set to grow faster than Salesforce and Adobe," Reitzes wrote.

His new price target of $210, up from $155 before, implies about 30% upside from Friday's close.

-Emily Bary

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09-16-24 1154ET

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