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| == DCF Valuation ==
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| Our $131.43 price target represents our DCF valuation on Oracle over the next 5 years. A discount rate of 7.46% and a perpetual growth rate of 3% were used in order to calculate discounted cash flows and terminal value<ref name=":0" />. The discount rate was calculated using the Weighted Average Cost of Capital (WACC) formula. The cost of equity was calculated using the Capital Asset Pricing Model (CAPM). A beta of 0.85, a market risk premium of 5%<ref>Damodaran. (2023). Country Default Spread and Risk Premiums. [https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html]</ref> and a risk-free rate of 4.16% were used in the CAPM calculation. This target price shows a potential upside of around 16.25% when compared to the current market price. DCF is an assumption-based model and the accuracy of those assumptions can significantly impact the valuation results. The assumptions used are included in the following table:
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| |Revenue growth (% change)
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| |8%
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| |The base case scenario assumes a revenue growth rate of 8%, given that Oracle is an established company and sell-side analysts provided this estimate (Capital IQ, 2023). Our bullish scenario assumes a revenue growth rate of 10%, whereas our bearish case assumes a revenue growth rate of 6%.
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| |Gross profit margin
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| |73%
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| |The last observation of gross margin was used. Our bullish scenario assumes a year-on-year increase of 0.5%, whereas our bearish case scenario assumes a year-on-year decrease of 0.5%.
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| |Sales & Marketing
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| |19%
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| |The historical average of Sales & Marketing was used.
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| |R&D
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| |17%
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| |The historical average of R&D was used.
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| |G&A
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| |3%
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| |The historical average of G&A was used.
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| |Tax rate
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| |10%
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| |The historical average of tax rate was used. Our bullish scenario assumes a tax rate of 7%, whereas our bearish case assumes a tax rate of 13%.
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| |Capital Expenditures
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| |$8,317 in 2024P, $8,073 in 2025P, $7,903 in 2026P, $7,000 in 2027P, $4,511 in 2028P
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| |For years 2024, 2025, 2026 the projections of sell-side analysts were used (Capital IQ, 2023). Subjective assumption were used for years 2027, 2028. Thereafter, it is anticipated that the capital expenses will gradually decrease to their previous levels. This is because Oracle will probably be unable to sustain its capital expenditures at such elevated rates due to substantial debt repayments and limited cash reserves.
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| == Sensitivity Analysis ==
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| [[File:Screenshot 2023-08-23 1.jpg|thumb|354x354px|Table 1]]
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| Sensitivity analysis provides valuable insights into the potential outcomes and risks associated with models which are based on a wide range of assumptions. As such, it is crucial to be implemented for models, such as the DCF.
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| Two significant variables that have an important impact in our DCF valuation were revenue growth rate and WACC. As it is widely known, when the WACC increases, the valuation decreases as they are negatively related based on the NPV formula. For example, in the first table, when the WACC increases by only 0.5%, the intrinsic value per share falls by approximately $17. If we increase it by another 0.5%, the intrinsic value per share drops to $100.61. Revenue growth is an essential part of the valuation as well, since it significantly impacts the free cash flow of Oracle. Under our bearish case (revenue growth rate equals 6%), Oracle's share is worth $115.81, whereas under our bullish case (revenue growth rate equals 10%) Oracle's share is worth $148.31.
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| [[File:Screenshot 2023-08-23 2.jpg|thumb|355x355px|Table 2]]
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| The second table includes another variable that can potentially alter our valuation result a lot, which is the perpetual growth rate. Here, under our base case, the company is expected to grow by 3% in perpetuity. This figure is most of the times tied up with the global GPD growth. However, it is worth noting that a perpetually growing economy is an idealized assumption and may not reflect the reality of economic cycles and fluctuations.
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| == Comparable Company Analysis ==
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| Our second method for valuing Oracle was comparable company analysis. Price/earnings, Enterprise Value/EBITDA, and Enterprise Value/Revenue ratios were used. The companies selected were the direct competitors, as mentioned above.
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| [[File:Screenshot 2023-08-23 3.jpg|thumb|994x994px|Comparables table|left]]
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| To begin, the EV/Sales metric was employed. This involved taking the revenue from the past year and multiplying it by the median EV/Sales ratio of competing firms. As a result, the estimated enterprise value stood at $278,895 million. After accounting for net debt, it became evident that the equity value equated to $193,752 million or $71.38 per share. Consequently, based on this ratio, the company appears to be overvalued compared to its peers.
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| Moving on, the EV/EBITDA ratio was employed. By taking the EBITDA over the last 12 months and multiplying it by the median EV/EBITDA ratio among rivals, the implied enterprise value reached $474,443 million. Deducting net debt led us to an equity value of $389,300 million. Dividing this amount by the outstanding shares yielded an implied value of $143.43 per share. Thus, according to this multiple, the company seems to be undervalued compared to its industry counterparts.
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| Lastly, the P/E ratio was brought into consideration. Earnings from the past year were multiplied by the median P/E ratio of the six comparable companies. The estimated equity value stood at $412,878 million. Dividing this sum by the total outstanding shares of 2,714 million resulted in a fair share value of $152.11. Once again, the company's valuation appears to be lower when compared to its peers. These outcomes suggest that investors might not be fully acknowledging the company's potential for earnings or growth relative to its competitors, leading to a lower valuation at present.
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| == Risks ==
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| '''Operational risk'''
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| Given the cloud-based nature of many of Oracle's services, operational risk becomes a significant consideration. Cloud services are reliant on stable and resilient infrastructure. Any technical issues, outages, or disruptions in data centers or networks could lead to service downtime and impact customer satisfaction. Furthermore, Oracle's cloud services need to be scalable and able to handle increased demand. Inadequate infrastructure to accommodate growth or surges in usage could result in performance issues and customer dissatisfaction.
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| '''Share repurchase risk'''
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| There is no guarantee that Oracle will keep buying back common stock like he did in the previous 3 years. In fact, it is expected from the company to suspend or reduce its share repurchase program given that it resulted in equity deficit in 2022. Furthermore, the company stated in its annual report that it is not going to increase its share repurchases until their gross debt is reduced below some unspecified level.
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| '''Reputational risk'''
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| Oracle holds vast amounts of sensitive data from its customers. Any breach of this data could lead to significant reputational damage, legal consequences, and loss of customer trust. In case customers lose their trust, they may stop buying products or continue using them. This could result in a revenue loss and high lawsuit expenses.
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| '''Acquisitions-related risks'''
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| Oracle has followed an aggressive acquisition strategy throughout the years. That can be seen by the large number of acquisitions that have been completed, such as Cerner, Adi Insights, FOEX, Federos, FarApp, among others. An aggressive acquisition strategy, while potentially beneficial in expanding a company's market presence and diversifying its offerings, also comes with several risks. The most important risk is the challenge of integrating the products and workforce of all these companies into Oracle's existing operations. Poor integration can lead to inefficiencies and cultural clashes.
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| '''Leverage levels'''
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| The company's debt level is really high compared to its competitors, which can be seen by its debt to equity and debt to capital ratios. This is a result of its share repurchase program as well as the aggressive acquisition strategy which involves a lot of debt. The company might have to suspend its repurchase program or reduce its capital expenditures in order to be able to reduce its debt levels. S&P has assigned a credit rating of BBB, which is low when compared to its competitors (e.g. Microsoft, Salesforce). Such a low credit rating can potentially lead to higher cost of debt moving forward<ref name=":0" />.
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| <references />
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