Goldman Sachs significantly raised the target price for Oracle but maintained a "Neutral" rating: Huge capital expenditures pose significant pressure on short-term profits

Oracle's stock price surged by 36% after the explosive guidance release. Goldman Sachs significantly raised Oracle's target price in its latest report but maintained a "Neutral" rating, believing that the massive capital expenditures will be delayed until cash flow reaches breakeven in fiscal year 2029, and there is still a lack of clear visibility on whether this can be converted into revenue growth.

According to news from the Wind Trading Desk, Goldman Sachs raised its target price for Oracle from $195 to $310 after the release of Oracle's second-quarter results for fiscal year 2026. Oracle's current stock price is $292.18, indicating about 6% upside potential, while Goldman Sachs maintains its neutral rating.

Oracle's Q2 revenue grew by 13% year-on-year, but it was 1% lower than market expectations. Despite the lackluster quarterly performance, Oracle's management significantly raised the long-term revenue expectations for its Oracle Cloud Infrastructure (OCI) business, forecasting it will reach $32 billion in fiscal year 2027.

This aggressive forecast prompted Goldman Sachs to adjust its expectations for Oracle's IaaS business, projecting revenues of $18 billion for fiscal year 2026, $32 billion for fiscal year 2027, $55 billion for fiscal year 2028, and $94 billion for fiscal year 2029.

Additionally, Oracle's quarterly results showed that its remaining performance obligations (RPO) surged by 359% year-on-year to $455 billion, indicating strong customer demand, but also raised questions about how the company will fund the necessary computing cluster construction. As a result, Goldman Sachs adjusted its capital expenditure expectations, delaying the free cash flow breakeven point to fiscal year 2029.

Quarterly Results Below Expectations, Cash Flow Under Pressure

Goldman Sachs stated that Oracle's total revenue for the second quarter of fiscal year 2026 was $15.039 billion, a 13% year-on-year increase, but 1% lower than Wall Street's expectations. The company's gross profit also fell short of expectations, declining by 3% year-on-year.

The most notable aspect was the significant increase in capital expenditures. This quarter's capital expenditures reached $21.2 billion, exceeding expectations by 62%, which directly led to a 123% deterioration in free cash flow.

Revenue from cloud services and license support was $12.141 billion, a 15% year-on-year increase, but still 0.6% below expectations. Revenue from cloud licenses and on-premises licenses was $766 million, a 12% year-on-year decline, exceeding expectations for a drop. Hardware business revenue was $670 million, a 2% year-on-year increase, slightly better than expected.

The operating profit margin was 42%, exceeding expectations by 60 basis points, indicating that the company still has some effectiveness in cost control.

OCI Business Outlook Significantly Upgraded, Growth Expectations Aggressive

Oracle's management has shown great confidence in the long-term prospects of the OCI cloud infrastructure business, significantly raising revenue expectations for the next five years. The company expects OCI revenue to rapidly climb from the current level to $32 billion in fiscal year 2027, $73 billion in fiscal year 2028, $114 billion in fiscal year 2029, and $144 billion in fiscal year 2030 Goldman Sachs has adjusted its forecast model for Oracle's IaaS business, expecting revenue to grow from $18 billion in fiscal year 2026 to $94 billion in fiscal year 2029. Analysts believe that Oracle's price/performance advantage in the IaaS market is competitive relative to hyperscale cloud service providers, with this advantage being particularly evident in generative AI workloads.

Oracle's Q2 RPO surged 359% year-on-year to $455 billion, setting a new historical high, indicating that the company has secured a large number of long-term contracts, providing a solid foundation for future growth.

Surge in Capital Expenditure Raises Cash Flow Concerns

To support the rapid expansion of its OCI business, Oracle's capital expenditure for the quarter reached $8.468 billion, exceeding expectations by 62%. Goldman Sachs expects the company to maintain high levels of capital investment in the coming years, raising the fiscal year 2026 capital expenditure forecast from $26.291 billion to $35.109 billion, and the fiscal year 2027 forecast from $28.920 billion to $42.131 billion.

This aggressive capital expenditure plan will have a significant impact on the company's cash flow. Goldman Sachs has pushed Oracle's free cash flow breakeven point from previous expectations to fiscal year 2029, reflecting concerns about the company's short-term cash flow generation capability.

Analysts point out that while they recognize Oracle's long-term commitment to AI investments, there is insufficient confidence that the capital expenditure can be converted into revenue growth, particularly in terms of the revenue contribution from AI inference business, which still lacks clear visibility.