- KeyBanc calls Oracle “undervalued” after a ~30% market-cap drop since late September, reiterating Overweight with a $300 price target (cut from $350).
- Fiscal Q2 FY2026 was mixed, with ~$16.06B revenue slightly missing estimates while cloud infrastructure grew ~68% and RPO jumped to ~$523B.
- AI and data-center expansion is driving capex up to ~$50B and has pushed free cash flow negative for the first time since 1999.
- Credit concerns are rising as five-year CDS widened to ~139 bps, making execution and RPO-to-revenue conversion key to closing the valuation gap.
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KeyBanc’s reassessment of Oracle positions the company at a crossroads between opportunity and risk. The firm’s analyst, Jackson Ader, while affirming an Overweight rating, has lowered Oracle’s price target from $350 to $300, citing mixed fiscal Q2 FY2026 financials and heightened concerns around margin execution.
Oracle’s revenue for the quarter came in at approximately $16.06 billion—up ~14% year over year—but still below Wall Street estimates. Cloud infrastructure revenue grew 68% YoY to $4.1 billion, though slightly below forecasted levels. These results were accompanied by weaker-than-expected guidance. Meanwhile, Oracle’s RPO—a forward-looking measure of contracted revenue yet to be recognized—rose to approximately $523 billion. That underscores strong demand, particularly via large AI contracts, but also emphasizes the delayed nature of revenue recognition.
On costs, Oracle is stepping on the accelerator: full-year capital expenditure (capex) expectations have been raised to $50 billion, up from earlier projections of ~$35 billion. This surge in spending is primarily directed toward AI infrastructure and data center expansion. While management claims intent to preserve investment-grade credit, the company has also posted negative free cash flow—the first such occurrence since 1999.
These financial decisions have drawn market and credit-market scrutiny. Oracle’s five-year credit default swaps have widened sharply, rising to ~139 basis points—the highest level in over five years—signaling increasing perceived default risk among bondholders and investors.
Key strategic implications include:
- If Oracle can successfully convert its massive RPO and cloud/A.I. investments into revenue while controlling costs and preserving margins, the current valuation may be seen as conservative, offering upside for long-term investors.
- However, the pressure from heightened debt levels, capital intensity, and possible margin erosion—especially within lower-margin cloud infrastructure—is real. Failure to deliver could lead to a re-rating downward.
Open questions that remain include:
- How quickly will large RPOs, especially those tied to AI and data center builds, convert into recognized revenue?
- What is the break-even point in terms of margin and capital efficiency for Oracle’s cloud infrastructure investments?
- Can debt levels and free cash flow trajectory be managed to maintain investment-grade credit ratings?
- Does Oracle have the competitive leverage against the large hyperscalers (AWS, Azure, Google) in cloud infrastructure, both technically and financially?
Supporting Notes
- Oracle’s market capitalization has fallen nearly one-third since late September, leading KeyBanc to call the stock “undervalued” and continue its Overweight rating with a $300 price target.
- Fiscal Q2 FY2026 revenue was approximately $16.06 billion, up ~14% YoY, but marginally below analyst forecasts. Cloud infrastructure (IaaS) revenue grew ~68% to $4.10 billion.
- Remaining performance obligations (RPO) rose sharply YoY to ~$523 billion, representing strong contracted future revenue and deal backlog.
- Oracle’s full-year capital expenditures were raised to ~$50 billion, driven by AI infrastructure and data center investment, up from previous forecasts of ~$35 billion.
- The company recorded negative free cash flow over the past year and in the most recent quarter, its first such negative result since 1999.
- Credit default swaps for five-year Oracle debt rose to ~139 basis points, the highest level in at least five years, reflecting increased perceived risk.
- Valuation multiples are elevated: Oracle’s price-to-earnings (P/E) ratio near ~38×, P/S near ~9½×, with historical medians considerably lower.