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Written by Rick Orford for The Motley Fool
Oracle's massive AI infrastructure spending has outpaced its cash flow, prompting a credit downgrade from S&P Global.
Despite concerns about its capex, Wall Street continues to rate Oracle a strong buy, in part due to is 121% cloud infrastructure growth and $664 billion backlog.
Based on analysts' EPS forecasts and Oracle's current P/E ratio, a $5,000 investment today could grow to almost $8,000 by mid-2028.
Oracle (NYSE: ORCL) is down 59% from its $322.54 52-week high. Earlier this month, the company said it was expanding its already significant layoff plans for this year, and the stock fell another 4%. Meanwhile, the biggest reason for its depressed performance continues to loom over it, static and undeniable. But history says a $5,000 investment in Oracle now could be worth significantly more by mid-2028.
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Let's start with why Oracle stock is down.
On the surface, Oracle is a well-oiled money machine. In its recent fiscal 2027 first-quarter report, the company announced record 30% revenue growth and 55% generally accepted accounting principles (GAAP) earnings per share growth.
And if we zoom in, things look even better. For the period, which ended Aug. 31, total cloud segment revenue was up 62%, cloud infrastructure (IaaS) grew 121%, while cloud apps (SaaS) increased 10%. And lastly, its remaining performance obligations (RPO) finished strong at $664 billion.
Obviously, the problem isn't the demand for Oracle's services.
The problem is that in fiscal 2026, the company reported $55.7 billion in total capital expenditures. That's a 163% jump from the $21.2 billion reported in fiscal 2025.
Then, in the first quarter of fiscal 2027, capital expenditures reached $28.5 billion, already over half of the fiscal 2026 total and well above 2025. Most of that spend went toward data center infrastructure to support the rapidly growing Oracle Cloud Infrastructure (OCI) business, particularly AI workloads.
Even worse, it doesn't have the cash to fund that spending. Oracle generated $32 billion in operating cash flow in fiscal 2026, yet free cash flow still landed at negative $23.7 billion, and it was negative $5.4 billion again in fiscal Q1. To bridge that gap, the company sold $20 billion worth of stock.
Plus, even before the company released its first-quarter financials for fiscal 2027, S&P Global had already downgraded Oracle's credit rating from BBB to BBB-. That puts its debt one short step away from a BB+ rating, which crosses the border into "junk bond" status.
Shareholders weren't happy, and the market punished Oracle. The case for holding the stock, however, depends on whether the company's massive spending makes sense.
Right now, Oracle is building data center infrastructure ahead of demand. The company has been aggressively expanding its cloud capacity to support AI workloads, and we already have early evidence that customers are willing to pay for it.
Cross-selling its customers into its cloud infrastructure and applications would be easy. It also already has major deals with hyperscalers that allow customers to run Oracle databases and workloads across platforms including Amazon Web Services, Google Cloud, and Microsoft Azure.
So, the company may have overextended itself up front, but its cloud infrastructure growth and the size of its backlog suggest it has a way to get it all back and then some. That's a big reason to stay invested.
And you know what? Wall Street appears to agree.
Three-quarters of the 44 Wall Street analysts covering the stock rate it a strong buy -- a pretty bullish consensus.
Today, the stock trades at a price-to-earnings ratio of about 21. Meanwhile, analysts expect Oracle's EPS to land in a range from $8.31 to $10.08 by mid-2028, with the average at $9.13. That average estimate, held at the same 21 multiple, implies a share price of about $191.73 by mid-2028, roughly 45% above where the stock trades today.
So, from Oracle's current trading price of $132.60, a $5,000 investment could grow to between $6,579 and $7,980 by mid-2028, assuming the 21 P/E multiple holds.
The point is, the severe punishment Oracle stock has suffered over the past year may have created a golden opportunity for investors to snap up its shares before its recovery begins.
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Rick Orford has positions in Amazon and Microsoft. The Motley Fool has positions in and recommends Amazon, Microsoft, Oracle, and S&P Global. The Motley Fool has a disclosure policy.