The big excitement surrounding September’s announcement of a huge contract backlog feels in some ways like a distant memory for Oracle (NYSE:ORCL). While it might be natural for a dip after the massive 36%, one-day jump on September 10, the company’s share price has lost almost 40% of its value over the past few months.
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It’s not just the fears of an AI bubble that have been pressuring ORCL, but also worries regarding the company’s huge capex and negative free cash flow that have sent the share price spiraling downward.
Not even promising figures in the company’s recent Q2 earnings release last week were able to staunch the bleeding. Indeed, Oracle’s Q2 remaining performance obligations (RPO, essentially its backlog) surged by 438% year-over-year to reach $523 billion.
However, the company’s trailing twelve-month capex also grew by leaps and bounds to reach $35.5 billion. Meanwhile, Oracle’s free cash flow for the past year sank to -$13.18 billion, a sharp reversal from the $11.8 billion it enjoyed in FY 2024.
While top investor James Foord acknowledges these looming debt concerns, he still spots an opportunity.
“I do believe the sell-off offers a reasonably good entry point,” explains the 5-star investor, who is among the top 2% of stock pros covered by TipRanks.
The big question is whether Oracle will succeed in transforming its enormous backlog of potential sales into revenue at healthy margins. Putting it even more bluntly, Foord asserts that “RPO is the core of the bull case.”
The investor is optimistic that the company will succeed. He cites management’s contention that the eye-popping numbers aren’t a “distant” backlog belonging to a far-off future.
While he calls the company’s negative cash flow “ugly,” Foord also posits that this could be part of a “deliberate, front-loaded investment phase” to build the AI capacity that customers have already pledged to purchase. In other words, it’s a feature, not a bug.
Moreover, the spreading concern could also create a window for investors.
“The key is to buy when the narrative is at its worst, and I think we are getting close to that point,” concludes Foord. “While there are risks, I do believe this is a reasonable and logical AI buildout that will eventually pay off.”
No surprises here, Foord is therefore assigning ORCL a Buy rating. (To watch James Foord’s track record, click here)
Wall Street seems to agree with this approach as well. With 24 Buys, 11 Holds, and 1 Sell, ORCL enjoys a Moderate Buy consensus rating. Its 12-month average price target of $300.23 implies an upside north of 60%. (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.