Dama maintains Oracle's (ORCL.US) “neutral” rating: OCI's performance is up to standard, but structural pressure on gross margin has hamstrung valuation

Zhitong Finance APPP learned that Morgan Stanley analyst Sanjit Singh maintained an Oracle (ORCL.US) “neutral” rating and a target price of $210 in the latest report. The title of the report accurately summarizes the core contradiction of this financial report: “OCI's performance is up to standard, and gross margin still needs to be raised.”

Earlier, Oracle handed over an almost impeccable financial report for the first quarter of the 2027 fiscal year. Revenue was US$19.35 billion, up 30% year on year; cloud infrastructure (OCI) revenue was US$7.4 billion, surging 121% year on year; new AI cloud contracts surged to US$30 billion in a single quarter; remaining performance obligations (RPO) soared to US$664 billion, surging US$209 billion year over year. However, the stock price reaction triggered by this financial report has become the most dramatic “deep V sample” of recent technology stocks — it rose nearly 8% after the market, but closed down 1.74% the next day, with a cumulative decline of more than 20% during the year.

As the gap between operational excellence and stock performance continues to widen, Oracle faces not a financial success or failure, but a fundamental question about “whether the AI infrastructure business model can be accepted by Wall Street.”

Dama's “neutral” stance is not a denial of Oracle's AI narrative, but rather a careful “awaiting verification.” The bank acknowledged that OCI production capacity delivery was scattered across multiple locations and did not rely on a single project; approved an average premium of 20% after the GPU contract expires, indicating that the company had pricing rights and was not forced to renew; it also acknowledged that the completion of the $20 billion equity financing plan eliminated short-term equity dilution pressure.

However, the core of Damo remains that the gross margin of the AI infrastructure business has not been proven to reach the high level of the company's traditional software business. As the share of cloud infrastructure revenue continues to rise, structural downward pressure on overall gross margins will be inevitable.

The real “elephant in the room”: $28.5 billion in capital expenditure and negative free cash flow of $5.4 billion

This is the root cause of the divergence between stock prices and fundamentals. Oracle's capital expenditure for the quarter soared to 28.5 billion US dollars, more than tripling from 8.5 billion US dollars in the same period last year. Free cash flow deteriorated sharply from negative $362 million in the same period last year to negative $5.4 billion. The size of the company's debt has reached 125 billion US dollars.

The annual capital expenditure guidelines remain in the range of 90 billion to 95 billion US dollars. Management expects net capital expenditure of approximately $70 billion for fiscal year 2027, far higher than the previous fiscal year of $55.7 billion.

The crux of the matter is: when a company burns nearly $30 billion a quarter to build a data center, and revenue growth is strong but far from enough to cover this level of capital consumption, what investors need is a clear timeline for “when to generate positive free cash flow.” Oracle's answer so far is “once you get to the climbing stage” — but how long will that take? Can capital markets' patience last until that point?

Morgan Stanley clearly stated in the report that the transformation of gross margin and free cash flow in the AI infrastructure business is a key variable that determines whether Oracle's valuation can shift from “neutral” to “increase holdings.”