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Oracle Corporation
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== DCF Valuation == 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: {| class="wikitable" |+ !Variable !Value !Commentary |- |Revenue growth (% change) |8% |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%. |- |Gross profit margin |73% |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%. |- |Sales & Marketing |19% |The historical average of Sales & Marketing was used. |- |R&D |17% |The historical average of R&D was used. |- |G&A |3% |The historical average of G&A was used. |- |Tax rate |10% |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%. |- |Capital Expenditures |$8,317 in 2024P, $8,073 in 2025P, $7,903 in 2026P, $7,000 in 2027P, $4,511 in 2028P |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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