Oracle's ORCL stretched valuation metrics promote compelling reasons why investors should consider selling the stock in 2025. Oracle currently trades at an elevated EV/EBITDA multiple of 21.89x, significantly higher than the Zacks Computer-Software industry average of 16.41x. This premium valuation suggests that investors have already priced in substantial future growth, creating a potentially dangerous situation where even slight underperformance could trigger significant downside movement.
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While Oracle has outperformed the broader market with a 25.8% gain over the past six months against the Zacks Computer and Technology sector's 4.9% and the S&P 500's 6.4% gain, respectively, this impressive run has pushed the stock's valuation to levels that may be difficult to sustain.
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On the recent second-quarter earnings call, CEO Safra Catz highlighted that Oracle expects cloud revenues to reach $25 billion this fiscal year, with impressive growth in Oracle Cloud Infrastructure ("OCI") revenues, indicating an increase of 52% year over year. The company also reported that GPU consumption increased 336% in the quarter, reflecting strong AI-related demand.
However, these growth metrics appear largely priced into the current valuation. With capital expenditures expected to double in fiscal 2025 compared to 2024, as stated by Catz during the earnings call, profit margin expansion may face headwinds in the near term.
Despite Oracle's impressive 52% growth in OCI, the company remains a smaller player compared to hyperscaler giants like Amazon AMZN-owned Amazon Web Services, Microsoft MSFT Azure, and Alphabet GOOGL-owned Google Cloud. Oracle's multi-cloud partnerships with these competitors, while beneficial for database migrations, also highlight its dependent position in the broader cloud ecosystem.
The company's remaining performance obligation (RPO) grew 50% to $97.3 billion, which shows strong future revenue visibility. However, with approximately 39% of total RPO expected to be recognized as revenues over the next 12 months, the growth curve beyond the initial recognition period becomes less certain.
Oracle's trailing 12-month free cash flow was $9.5 billion, with a concerning trend showing a 6% decline in the most recent quarter despite operating cash flow increasing 19%. This divergence is primarily due to significantly higher capital expenditures, which reached $4 billion in the second quarter alone. As the company continues to invest heavily in data center expansion, free cash flow may remain under pressure.