Oracle (NYSE:ORCL) stock is feeling the heat on Thursday, tumbling 10% after its fiscal Q2 results failed to win over investors. And if you were among those who rushed to hit the sell button, Bank of America thinks you may have jumped the gun. But before we get to their case, let’s break down what caused the sell-off in the first place.
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The company just missed on the topline, delivering revenue of $16.06 billion, amounting to a 13.9% year-over-year increase yet falling shy of the consensus estimate by $130 million. On the other hand, adj. EPS came in at $2.26, well above analyst expectations of $1.64. That said, the outperformance was largely driven by the sale of its Ampere chip business to SoftBank, which added $0.91 per diluted share to pretax earnings.
But the disappointment seemed to lie elsewhere. For one, Oracle Cloud Infrastructure (OCI) revenue increased 69% year-over-year, hitting market expectations of around $4.1 billion but failing to outperform. Moreover, capital expenditures came in at $12 billion, $3.8 billion above consensus, resulting in negative free cash flow of nearly $10 billion for the quarter. During the conference call, management noted that FY26 capital spending (ending May 31) is expected to be $15 billion higher than previously anticipated.
With the company now entering into the “heaviest phase of its AI infrastructure buildout,” Bank of America analyst Brad Sills argues that the quarter didn’t signal a deterioration in Oracle’s business, but rather exposed the “timing mismatch of buildout spend to revenue conversion.” Sills pointed to the underwhelming OCI revenue growth and the elevated capex required as Oracle ramps its infrastructure to support the massive $523 billion OCI AI backlog. Still, Sills frames the shortfall as an “investment curve issue rather than a change in fundamentals.”
And that’s where his thesis lands. Fundamentals “remain strong,” he says, and the present weakness is down to elevated capex needed to keep pace with rapid AI demand. Underlying trends are positive: AI demand “continues to swell,” large site builds are on schedule, OCI’s “fungible architecture” supports diverse compute needs, and the company maintains strong financing access while upholding investment-grade credit.
As for the stock, it has now given back all of its gains “and some” since the September OpenAI announcement, reflecting “skittish investor confidence in Oracle’s ability to transform into an AI compute hyperscaler.” Yet, Sills thinks there is room for sentiment and estimates to move higher. AI spending remains strong across a wide range of enterprises, and Oracle’s applications business is showing “early signs of an AI halo effect,” with revenue accelerating to 11%, up 200bps year-over-year.
“We therefore focus on the catalysts that could drive upward stock momentum, namely accelerating revenue conversion, improving visibility into the OCI AI margin profile, and AI-driven momentum across applications and database offerings,” the analyst summed up.
Bottom line, Sills assigns ORCL a Buy rating, but given “valuation contraction across the AI cohort,” his price objective goes from $368 to $300. Nevertheless, the new target still makes room for 12-month returns of 50%. (To watch Sills’ track record, click here)
22 other analysts also take a positive view of Oracle’s prospects and with an additional 11 Holds and 1 Sell, the analyst consensus rates the shares a Moderate Buy. There are plenty of gains projected here now; at $346.11, the average price target implies the stock will climb 73% higher over the one-year timeframe. (See ORCL stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.