I'm LongbridgeAI, I can summarize articles.Investor Florian Muller cautiously upgraded Oracle (ORCL) to 'Hold' from 'Sell', acknowledging that the stock's significant price drop better reflects financial risks, despite maintaining a non-bullish stance. While Oracle's debt rating was cut to BBB- and bond yields rose sharply due to heavy AI infrastructure spending causing negative free cash flow, revenue growth has accelerated. The trailing P/E has fallen to ~22x, narrowing the gap with bond yields. This contrasts with a broader market consensus of 'Strong Buy' and an average price target implying 85% upside.
Oracle (NYSE:ORCL) stock has undergone a major reset over the past year, with the shares down by 31% as investors have become more focused on the company’s debt, cash flow and the huge spending required to support its AI infrastructure ambitions. While revenue growth has picked up, the stock’s lower valuation now better reflects the risks that bond investors have been pricing in for some time.
Looking at the company’s current situation, investor Florian Muller argues that Oracle’s debt market is still sending a cautious signal. In July, S&P Global cut Oracle’s debt rating to BBB-, just one notch above junk status. Meanwhile, the yield on a long-dated Oracle bond maturing in 2055 has climbed to almost 8%, compared with around 6% for the broader BBB corporate bond index. In simple terms, investors are demanding a much higher return to lend money to Oracle.
Muller notes that Oracle’s bond yield has risen by roughly 210 basis points over the past 10 months, compared with about 100 basis points for the broader BBB index. That means some of the increase can be explained by the wider bond market, but a significant portion is specific to Oracle. The bond market is therefore signaling that investors see Oracle as carrying more financial risk than it did previously.
That said, assessing the investment case, Muller sees one notable improvement in the stock’s valuation. Oracle’s trailing P/E has fallen to around 22x, giving it an earnings yield of roughly 4.7%. That has narrowed the gap with the bond yield considerably. Muller acknowledges that earnings yields and bond yields are not directly comparable, since shareholders can benefit from future earnings growth while bondholders have a fixed contractual claim. Still, the narrowing gap suggests that equity investors have adjusted Oracle’s valuation to better reflect the risks already being priced into its debt.
Cash flow remains the bigger concern. Oracle generated $47 billion of operating cash flow over the past year but spent around $76 billion on investment, leaving free cash flow at negative $29 billion, or roughly 40% of revenue. At the same time, revenue growth has accelerated, with quarterly revenue recently rising 30% year over year and infrastructure revenue more than doubling.
Muller prefers to focus on cash flow rather than reported earnings because accounting assumptions around the useful lives of data-center assets can affect depreciation and therefore earnings. Oracle stands out among hyperscalers for having particularly long implied asset lives.
All told, against that backdrop, Muller has cautiously changed his stance. “I am still far from turning bullish on Oracle. However, top-line growth continues to accelerate, and the stock price came down significantly over the past 10 months, more adequately reflecting the risk-reality behind its financials,” the investor said. “I am thus cautiously upgrading to Hold (from Sell). However, this is still not a Hold out of conviction. It merely represents the acknowledgment of the equity rerating.” (To watch Muller’s track record, click here)
Four Street analysts join Muller on the sidelines, yet with an additional 27 Buys and 1 Sell, the stock claims a Strong Buy consensus rating. At $245.75, the average price target implies shares will gain 85% in the months ahead. (See ORCL stock forecast)