Reiterates buy rating on ORCL with low conviction; stock is fairly valued but speaker is slightly more bullish post-results.

Oracle just reported quarterly financial results and the stock is up over 3% in the after market hours. The company reported an additional $30 billion in backlog just from 3 months earlier and it's RPO, remaining performance obligations, have soared to $664 billion.

But does all of this make Oracle stock a buying still? Remember I've had the stock ranked as a buy, so I'm happy to see the share price increasing. But let me share with you these latest results and let me share with you my updated estimates for fair value and update you on my ranking for buy, hold, or sell for Oracle stock following these results.

Of course, to me one of the bigger numbers that came out of this event is the company's update on remaining performance obligations.

This is because the backlog is where Oracle is serving. The company's building massive data centers, expanding, spending tens of billions of dollars because it has orders. It has customers waiting in line to consume that data center capacity as soon as it's built.

And year-over-year, this figure jumped by 290 billion to 664. So as more of its data centers are coming online, meaning finishing up and being ready to be consumed, its quarterly revenue growth is accelerating.

In the most recently completed quarter, revenue increased 30% to 19.3 billion with the delivery of 850 megawatts of additional data center capacity. So, the situation in the market continues to be imbalanced in favor of companies like Oracle, Microsoft, Amazon, Coreweave, Nebius, etc., the ones that are providing the computing capacity.

So, when you look at profitability of these deals, they remain lucrative. So, Oracle generated $19 billion in revenue and $6.7 billion in operating income. Revenue was up 30%, operating income was up 57%.

So, profits on margins very healthy, but what's questionable is the cash flow situation. That's where a lot of investors have concerns. Not on the margins of the sales, right? When they make a $100 sale for renting computing capacity, the margin on that sale is very attractive.

But, what's not very attractive is the cash flow situation. You have to build these data centers up front, spend the capital up front to build it, and then you get the cash flow later.

You get the cash flow in smaller increments every quarter, every month, every year, and it takes multiple quarters, multiple years to make up for the upfront cost of that data center that you built.

So, given that situation, I'm watching closely operating cash flows of companies like Oracle and the good news is this number was up big. $23 billion the number. It was up 184% year over year.

That's what you want to see from companies like Oracle.

Even after this big increase in cash flow, the free cash flow was still negative at 5 billion. Just to signify the magnitude of how much more spending they're doing compared to how much cash flow is coming in.

There was an important element in the company's recently reported results. I already mentioned the big increase in backlog, right? $30 billion incremental increase up to 664 billion.

But based on the structuring of these new contracts, the company confirms there is no incremental impact on its plans to raise capital. Meaning a lot of these new contracts that Oracle signed in the recent 3 months, it came with a deposit.

It came with an upfront cash deposit from the customer. So that helps with Oracle's cash flow situation. It helps the company build these data centers initially and then recoup later on down the road.

And of course, since cash flow is negative, they need to get the capital somewhere. And Oracle during the first quarter completed a sale of $20 worth of common stock.

Looking ahead, Oracle expects revenue to accelerate, growing 32% at the midpoint in the upcoming quarter. This would be an acceleration from 30% in the completed quarter.

For the full year, Oracle now is forecasting revenue of at least $90 billion and non-GAAP earnings per share at $8.10. Again, these are not the concerning figures. The free cash flow figures are the ones that are most under the microscope from investors of companies like Oracle.

So, taking a closer look at the balance sheet in the quarter that ended August 31st, the company's long-term debt decreased by roughly $5 billion, down from 122 to 117 billion.

They paid down billion in debt. And for a company like Oracle that's highly leveraged, that's a positive sign. If a company was not so leveraged, then I wouldn't be so excited about paying down debt.

It wouldn't be such a big deal. But for a company like Oracle, very highly leveraged, paying down some debt is positive. It de-risks the company. It probably paid down some of its highest interest expense, and it allows the company to be perceived from investors as a little bit less risky than it was just 3 months ago.

So, here's the big thing. Cash flow from operations increased from 8.1 billion in the same quarter last year up to 23.1 billion. One of the bigger reasons for that is they got increased prepayments from customers, $11.3 billion worth.

That's big because the company spent $28.5 billion dollars capital expenditures in the quarter. This was almost half of their capital expense. So, that's big.

So long as Oracle keeps getting these big deposits from customers when they're building these new data centers, investors will view these as very positive because they already have the orders from customers.

What investors are skeptical about or what investors are concerned about is the mismatch between cash flow. If they're getting upfront payment from these deals, the stock could soar.

The stock and others in this industry could soar if they start attracting big down payments, big deposits from customers.

if Anthropic and OpenAI go public and they're able to raise roughly 100 billion dollars from investors and continue to have access to more stock sales, that will be very positive for companies like Oracle that could then attract some of that money from those companies to help offset some of these large capital expenditures.

So, I like this timeline here of Oracle's operating cash flow, capital expenditures, and free cash flow. And in the fourth quarter of 2026 fiscal 2026, they generated 14.6 billion in operating cash flow and their CAPEX were 6.16.5 billion, resulting in a negative cash flow of 1.9 billion.

The quarter before that it was much worse at -11.4. Quarter before that was -10 quarter, the most recently completed quarter was -5.4 billion.

But that was on a much larger operating cash flow and much larger capital expenditure. In fact, the largest capital expenditure in any of the previous five quarters, $28.5 billion worth.

But, the good news was that they were funded $11.3 billion from customers, which was the largest payment prepayment.

And these prepayments only started two quarters ago, where they received $4.6 billion in the I I should say one quarter ago, where they received $4.6 billion. So, this is only the second quarter that they're starting to be able to command these prepayments.

I'm sure they wanted prepayments before, but they weren't able to negotiate for it because there was enough capacity available for these customers to go to someone else. But now these customers are negotiating, are forced to pay these down payments, and it accelerated from four $4.6 billion up to 11. 4 billion.

Hopefully, for Oracle, this continues. However, I don't know if there's cash available to give to Oracle.

Otherwise, the companies could be left on the hook, holding the bag for the debt that OpenAI and Anthropic owe.

So, checking back in here, Oracle stock is now up over 4% in the after-market hours, but it was down 5.4% during regular trading hours, so it hasn't made back the losses during regular trading hours.

Oracle is now trading at a forward price to earnings of just 14. This is near the cheapest the stock has traded for going back several years. And again, you rarely see this where a company is growing revenue by 30% accelerating revenue, profits growing by 60%, cash flow from operations growing triple digits.

You won't see a company like that trading at this kind of valuation if it wasn't for the significant concern about cash flow, negative cash flow, accelerating negative cash flow, expected to continue not just for this year, but also next.

That's why the stock is trading at a relatively cheap valuation.

Speaking of cash flow, I'm forecasting -25 billion this year, -48 billion next year, and -41 billion 2028. So, this is the big concern. If you're investing in Oracle, the company's not going to turn back positive according to my estimates until 2029 with $15 million in cash flow expected.

Now, despite all those negatives, I calculated a fair value increase the fair value estimate of Oracle, in fact, up to $128 per share. Current market price is about $160 per share if we look at the after-market hours, 160.38 to be precise, and I calculated a fair value estimate of 128.

So, looking at the forward PE multiple, it looks undervalued. Looking at my DCF, it looks slightly overvalued. Comprehensively, I will say the stock looks fairly valued.

So, I've had the stock ranked as a buying opportunity, and I last updated it on August 17th with a low conviction level on that ranking. And today, I will be reiterating that rating with a low conviction level.

I will say that after these quarterly results, I'm slightly more bullish on the company.