Will Oracle's Cloud and AI Deals Propel It to New Highs?

Shares of enterprise computing, cloud, and data management pathbreaker Oracle Corp. (NYSE: ORCL) climbed by an astonishing two-thirds in the last year, repeatedly setting record highs (and making co-founder Larry Ellison the second-wealthiest person in the world in the process). As analysts from Jefferies, D.A. Davidson, Bernstein, and elsewhere raised their price targets for ORCL shares recently, it appears the company's upward momentum may continue.

Indeed, Oracle has many things working in its favor, including a successful cloud database offering, massive AI infrastructure improvements, flagship cloud services agreements, and key strategic partnerships. However, investors considering a new or larger position in ORCL should be cautious, as the market may have overestimated the company's growth potential, especially after shares have already risen by 67% in the past 12 months. Further, concerns about upcoming capital needs and margin hits after federal government discounts might be a cause for hesitation.

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Massive Cloud Growth, With No Signs of Slowing

A major driver of Oracle's recent success is its expanding cloud database services. The company has rapidly grown its cloud and MultiCloud divisions, both in applications and infrastructure, with a 24% growth rate for fiscal 2025. It projects this to increase to over 40% in fiscal 2026. Specifically, cloud infrastructure growth is expected to rise from 50% in fiscal 2025 to 70% in the next fiscal year.

Meanwhile, the company's unique MultiCloud offerings, which allow customers to leverage the advantages of multiple cloud providers simultaneously, also generated notable revenue growth. Its multicloud database revenue from Amazon, Google, and Azure increased by 115% sequentially in the fourth quarter of fiscal 2025. The firm plans to triple the number of MultiCloud data centers next year.

Cloud database services are quickly becoming one of Oracle's main revenue sources, with a 31% year-over-year growth in the latest quarter, totaling $2.6 billion in revenue. Thanks to heightened AI integration through the company's Oracle 23 platform, Oracle's database services are gaining popularity among enterprise customers, helping the company stand out from competitors.

Agreements and Partnerships Drive Optimism

Oracle's recent growth may largely stem from its discreet announcement through Form 8-K regarding a new MultiCloud deal, projected to generate over $30 billion annually. Given that the company's total revenue for fiscal 2025 was $57.4 billion, this contract is highly significant, even though the revenue increase won't impact figures until fiscal 2028. Additionally, partnerships with AI companies Kanverse.ai and PrimeVigilance are expected to further expand Oracle's presence in the cloud industry.

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Watch Out for Capital Stretch, Short-Term Margins, and Lofty Valuation

All of the added AI infrastructure has understandably lifted Oracle's expenditures, and the company's capital expenditures for fiscal 2026 could be higher than $25 billion. At the same time, the company will want to maintain its dividend and engage in share buybacks, all of which will stretch its available capital further. Combined, these factors may negatively impact the company's free cash flow and force it to raise billions in the years to come.

More immediately, investors might worry about Oracle's steep 75% discounts on some of its services to U.S. federal government agencies. This move could pressure the company's margins and potentially unsettle investors as it waits for revenue from the $30-billion contract mentioned above.

Additionally, Oracle's trailing P/E ratio of 54.1 is about half again higher than it was in mid-2024, suggesting that the market has already priced in at least a portion of the benefits listed above into ORCL shares. Investors should beware of the tremendous hype surrounding this company, which may threaten to overshadow its very real growth drivers.

Believe the Hype—Oracle Could Continue to Rise

With the above risks in mind, investors serious about holding Oracle for a longer timeframe may take heart in the company's new dominance in the database, cloud, and MultiCloud spaces. There are ample signs to suggest it will be a crucial part of the AI and data industries as they continue to balloon in the coming years.