High revenue growth, declining profit margins, and a high dependence on OpenAI, Morgan Stanley believes Oracle has "limited upside potential."

Morgan Stanley's latest research report shows that Oracle, driven by strong performance in its AI infrastructure business, is expected to raise its revenue target for fiscal year 2029 from the previous $104 billion to $125 billion, although profit margin pressure cannot be ignored.

On September 8, Morgan Stanley analyst Keith Weiss pointed out in a report forecasting Oracle's performance that due to the strong growth of the AI infrastructure business, especially the substantial contracts with OpenAI, Morgan Stanley has significantly raised Oracle's revenue expectation for fiscal year 2029 from $104 billion to $125 billion.

However, the report notes that the newly added AI infrastructure business has a lower profit margin, which is expected to drag down the company's overall operating profit margin. The margin is projected to decline from 44% in fiscal year 2025 to 39% in fiscal year 2029. According to an article from Wall Street Journal, Oracle did not reaffirm its previously set non-GAAP operating profit margin target of 45% for fiscal year 2026 in its fourth-quarter financial report.

The report particularly focuses on the risk of customer concentration for Oracle. The $30 billion annualized revenue contract announced by Oracle in June (involving 4.5GW capacity) is speculated to mainly come from OpenAI. Analysts estimate that OpenAI could account for about $40 billion of Oracle's $125 billion revenue target for fiscal year 2029, equivalent to 30% of total revenue.

Based on the $125 billion revenue and pressured profit margins, Morgan Stanley predicts Oracle's earnings per share (EPS) for fiscal year 2029 will be between $11.50 and $12.00, with a target price of $246. As of Monday's close, Oracle's stock price was $238.48, leaving only a 3% upside potential.

AI-Driven Revenue Growth Accelerates, Fiscal Year 2029 Target Raised to $125 Billion

Oracle's stock price has risen more than 60% over the past 12 months, significantly outperforming large software peers, with its core driver being the market's perception of it as a major beneficiary of AI infrastructure development.

The report reinforces this view, noting that Oracle's order commentary for the fourth quarter of fiscal year 2025 was extremely optimistic, followed by the announcement of a $30 billion annualized revenue contract. Reports suggest this was signed with OpenAI, greatly boosting market confidence.

The report analyzes that Oracle's remaining performance obligations (RPO) are expected to grow by over 100% year-on-year in fiscal year 2026, reaching approximately $280 billion. This means that by the end of fiscal year 2026, the company's backlog of orders could almost cover 90% of its original $104 billion revenue target for fiscal year 2029.

Therefore, Morgan Stanley believes that Oracle is likely to raise its revenue target for fiscal year 2029 to $125 billion at the upcoming analyst day. This forecast is primarily driven by three major growth engines in Oracle's Cloud Infrastructure (OCI) division:

• Traditional Infrastructure Services: Growing from $4.8 billion in fiscal year 2025 to $11.6 billion in fiscal year 2029
• Cloud Database Services: Growing from $2.3 billion to $6.7 billion
• AI Infrastructure Services: Surging from $2.6 billion to $52.2 billion, with a compound annual growth rate of 111%

Analysts have built models based on the implied AI revenue framework from capital expenditures, predicting that Oracle will achieve a compound annual growth rate of over 20% in revenue by fiscal year 2029.

Earnings Expectations Relatively Conservative, Limited Upside for Stock Price in Base Scenario

Despite significant upward revisions in revenue expectations, the research report presents relatively conservative earnings expectations for Oracle.

The report clearly states that Oracle avoided reiterating its previous target of "achieving a 45% operating profit margin by fiscal year 2026" in its recent financial report. This aligns with recent news of layoffs to support AI investments, indicating that the company is reallocating resources internally to cope with the cost pressures brought by AI business.

Morgan Stanley's model shows that this change in business mix will have a substantial impact on profit margins. The gross margin for traditional on-premises database business is as high as 97%, while the gross margin for strategic SaaS business is around 75%, whereas the gross margin for the newly added AI infrastructure business is expected to be only about 40%.

The research report emphasizes that according to the revised baseline scenario for fiscal year 2029, Oracle is pushing for non-GAAP operating expenses to account for nearly 20% of revenue, while Microsoft's recent operating expenses have been controlled at around 20%.

Analysts emphasize that Oracle's future performance improvement will mainly come from enhanced operational efficiency. In this case, as shown below, Oracle needs to keep operating expenses (as a percentage of fiscal year 2029 revenue) below 20% to exceed market expectations.

Therefore, despite the significant increase in revenue expectations for fiscal year 2029 by over $20 billion, Morgan Stanley's base scenario predicts that operating profit margin will decline from 44% in fiscal year 2025 to 39% in fiscal year 2029. Earnings per share (EPS) for fiscal year 2029 are expected to fall in the range of $11.50 to $12.00 (the model specifically predicts $11.65).

After considering Oracle's high growth, low profit margins, and customer concentration risks, the research report gives a "neutral" rating and a target price of $246. The valuation logic is as follows:

• In the base scenario, Oracle's EPS for fiscal year 2029 is $11.65. Referencing Microsoft's valuation level, a price-to-earnings ratio of 25 is applied, yielding a forward stock price, which is then discounted back to fiscal year 2027 using an 8.7% weighted average cost of capital, resulting in a target price of $246. Considering Oracle's current stock price of $238, there is very limited further upside in the short term
• In a bull market scenario, if Oracle's AI business profit margin and operational efficiency exceed expectations, FY2029 revenue could reach $135 billion, with an operating profit margin maintained at 41%, resulting in an EPS of $13.67. The target price for FY2027 is expected to reach $347, representing nearly a 50% upside from the current stock price.

(Oracle's PE and target prices under different scenarios)