Oracle (ORCL) Up After Earnings, But Does Report Hide Pitfalls?

0:00It's time now for our 360 round to take a closer look at Oracle. The company moving higher on a top and bottom line beat, strong guidance as well here. Joining us now to discuss more Robert Cantwell, the founder and portfolio manager at upholdings investment management and Luke Yang, equity analyst technology over at Morningstar. Thanks for being with us today. Robert, let's start with you. We're seeing about a 10% move still to the upside for Oracle on the heels of this earnings report. Take me through what you think are some of the key takeaways. Well, it's been a pretty fascinating start to the year for the LLM revenue generators. Inclod really started it having doubled their run rate here in just the last 90 days. And you're seeing that enthusiasm show up in Oracle's results with that $553 billion back log number that they reported. So as we look across the entire space, we see about $50 billion of run rate LLM revenue right now. That number is very quickly on its way to 100.

1:00It's remarkable how quickly they've gotten there. The entire mobile ad industry is somewhere around $4 to $450 billion and they're already tracking to almost a quarter of that. So the spending that's happening is pretty wild. What's challenging with the Oracle is they're spending it just as quickly as they're bringing it in. And they're trying to keep Wall Street focus on that 44% cloud number. But this is a company whose revenue's grown 22% and that's not impressive. And even though they're trying to get us to look at a 44% cloud growth rate, I'm looking at a company that's spending more than a dollar of revenue and capex right now. And I just don't believe that their expenses are accurately tracking against the revenue that they're recording at this stage in the company's life. All right, Luke. So we've got shots fired across the bow here just to kick things off. So I'm going to bring you in here to address some of what Robert just said there. I saw your note out this morning, you raised your fair value estimates up to 220. You've got a four star rating here on Oracle.

2:00What were some of your thoughts when you saw the numbers come across and also what are your thoughts about what Robert just said there? Yeah, I think overall we saw very strong results both on the top line and bottom line. And also we see very positive guidance for fiscal 2027 of $90 billion in total revenue so a lot of positive signs we see data center build out that Oracle has undertaken. Also, I think an important update is regarding their financing plans that they're going to raise 50 billion in calendar year 2026. So I think having more clarity on the financing also can help mitigate some of the investor concerns there. And yeah, as Robert just mentioned, I think a lot of investors are looking at the growth of Oracle's cloud business and it is the main metric.

3:02I would say the stock has been trading on. So going forward, I would definitely say like how Oracle can continue to ramp up and deliver all the cloud capacities will remain topic that investors maintain their focus on. And Robert, you highlighted there that we might be selling some unprofitable cloud revenue to boost these growth numbers. Also mentioned that the capex actually exceeded the revenue in the quarter. So I guess what at what point does that level of spending become a real risk for investors? Because this move that we're seeing to the upside today isn't seemingly flagging any concerns more broadly from the street. Well, the stocks up today, but we last talked three months ago and the stock is even with today's moves still down about 10% off of that. And I'd wager that when we talk again in another three months that the stock is likely to be down again even though today is up.

4:04And the reason that's happening is this is where it's really helpful to have a company like CoreWeave out there in the public because CoreWeave is really the pure play version of the business model that Oracle has been trying to rapidly pivot into. And so you get a much cleaner representation of financials. Oracle has been a public company for decades. They know how to make the numbers look good to public market investors. And so it's very challenging to take any numbers at face value that a company like Oracle reports because they've got so many different business units. They've got so many different ways of reclassifying revenue. And so what you can do with the CoreWeave, by the way, if you look at the enterprise value to the asset sizes of these companies, CoreWeave is about a $50 billion company with about $50 billion of assets. Oracle by comparison, you're paying a $500 billion total enterprise value for a company that has about $150 billion dollars of assets. So the market is valuing it at $4 for every dollar of asset, as opposed to

5:08CoreWeave, which is about a dollar for a dollar. That level of mismatch for two companies that are doing the same thing. They're competing in the same chips. They're building the same data centers. They're chasing a little bit of different customer segments. CoreWeave is going after more of the emerging or are close going more after the Fortune 1000. There's just a very large accounting mismatch between the two. And I think that it provides public investors the opportunity to do the work to figure out what is really going to happen to Oracle's financials when they spend this much CapEx and how that's going to flow through and ultimately make it a lower margin business than they've been historically. And Luke, we're running really tight on time, but I want the last question to go to you. The remaining performance obligation backlog was up 325%. Robert saying it doesn't necessarily guarantee profits, but how confident are you that Oracle could actually convert that massive backlog into real revenue? Yeah, we definitely liked the growth trend of RPOs that Oracle has been saying. But one caveat here is that the customer concentration

6:13concern is still there with a lot of the bookings coming from OpenAI. So overall, I think as long as the demand for LLM remain healthy, I'm not too concerned about how they can convert the gigantic amount of RPOs into their revenue and push up their revenue growth in future quarters. Well, appreciate you both being with us to take that closer look at Oracle. Today still up close to 11% now on the heels of that earnings report, Robert can't well the founder and portfolio manager at upholdings investment management and Luke Yang, the equity analyst technology over at Morningstar.