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A $1,000 investment in Oracle (NYSE: ORCL) could grow to roughly $2,430 by 2029. This assumes that the company converts its cloud backlog on the schedule management has outlined, it meets Wall Street's fiscal 2029 average per-share earnings estimate of $15.80, and the stock continues to trade at a recent 20 price-to-earnings (P/E) multiple.
Oracle's remaining performance obligations (RPO) stood at $664 billion as of fiscal first-quarter 2027 ended Aug. 31. That's an increase of $209 billion from a year earlier.
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Delays in bringing more cloud capacity online are a risk that could throw off Wall Street's estimates. Still, Oracle's RPO is contracted revenue, providing line of sight into future revenue at a time when demand for AI infrastructure continues to outpace available capacity across the industry.
Oracle provides cloud infrastructure services for artificial intelligence (AI) workloads, Fusion applications that run core business processes, and the Oracle Database. This combination of infrastructure, applications, and AI solutions differentiates Oracle from competitors and continues to drive strong demand from enterprises.
Cloud infrastructure revenue reached $7.4 billion in the first quarter of fiscal 2027, up 121% year over year. RPO rose $26 billion from the prior quarter, and management expects roughly half of the total backlog to convert into sales during the next 36 months.
Company projections for the full fiscal year call for total revenue of at least $90 billion and non-GAAP (meaning not in accordance with generally accepted accounting principles) earnings per share of $8.10. Demand is not letting up. Graphics processing unit (GPU) utilization stood at 97.9% in the quarter, reflecting that nearly every chip is being used by customers for AI workloads, and capacity that came up for renewal was renewed or resold at a 20% premium to prior contracts.
Synergy Research Group has reported that generative AI-specific cloud services grew 165% year over year in recent periods, with Oracle among the fastest-growing providers outside the top three (Amazon, Microsoft, and Alphabet's Google). Goldman Sachs projects that the five largest U.S. hyperscalers, including Oracle, will spend about $1.2 trillion on AI infrastructure in 2027.
Investors might think that a 20 P/E for a cloud provider with this much demand appears too low. But the low valuation reflects concerns about the long-term payoff from higher capital spending, particularly with the company's free cash flow under pressure right now.
Oracle expects capital expenditures of $90 billion to $95 billion for fiscal 2027, with net cash capital expenditures of $70 billion or less after customer prepayments and similar financing agreements. This approach of using prepayments and customer-funded hardware takes a lot of the burden off Oracle in raising capital. Still, free cash flow was negative $5 billion in the latest quarter as it continued to spend aggressively to bring more capacity online.
A large portion of the backlog is concentrated with a handful of customers, and any delay in bringing data-center capacity online could slow the conversion of the backlog into revenue. If Oracle fails to convert its backlog into additional revenue and misses Wall Street's earnings estimates, the upside could be limited.
Still, Oracle's infrastructure growth has accelerated for several quarters, GPU utilization remains high, and the company has already shown it can renew older capacity at a premium. If the backlog converts on the 36-month schedule management has described, and the stock is still trading at today's valuation on future earnings, the shares could reach $316 in three years. At the Oct. 14 close of $130, a $1,000 investment would be worth roughly $2,430.
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John Ballard has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Goldman Sachs Group, Microsoft, and Oracle. The Motley Fool has a disclosure policy.
Oracle's Cloud Backlog Just Hit $664 Billion. Here's What a $1,000 Investment Could Be Worth If It Converts to Revenue on Schedule. was originally published by The Motley Fool
