ORACLE CORP (ORCL) stock intrinsic value fair value estimate & owner earnings analysis

Oracle is two businesses sharing one balance sheet. The first is the franchise it has run for decades: database and business software that customers license, then pay to support and update every year. In the year to May 31, 2026, software support brought in $19.8 billion (up 1%), cloud applications $15.9 billion (up 11%) and new software licenses $4.7 billion (down 9%), with hardware and consulting adding about $8.8 billion. Once a company's core systems run on Oracle, switching away is costly and risky, so support revenue stays steady. The second business is new and very large: renting computing capacity, mostly for artificial intelligence, from Oracle Cloud Infrastructure. That revenue rose 77% to $18.1 billion. Total revenue was $67.4 billion. The second business is what makes Oracle hard to value. Contracted revenue not yet earned rose from $138 billion to $638 billion in one year, mostly from certain very large cloud contracts signed during the year. Oracle expects to earn about 12% of that $638 billion over the next twelve months, 34% in each of the following two-year periods, and the rest after that. To deliver it, Oracle spent $55.7 billion on equipment and data centers in fiscal 2026, up from $21.2 billion, and says spending will keep rising in fiscal 2027. It borrowed heavily to pay for this: senior notes and other borrowings reached about $130 billion. It has also signed $260 billion of data-center leases that start between mid-2026 and 2029 and run for 15 to 19 years, none of which is on the balance sheet yet. In February 2026 it sold $5 billion of convertible preferred stock, which turns into roughly 25 to 31 million common shares in January 2029, and it set up a program to sell new common shares, though none had been sold by May 31, 2026. How we measured earnings: we start from the cash the business generates, remove short-term swings in working capital, and charge stock-based pay as the real cost it is. Nearly all of the spending on new capacity is for growth, not upkeep, so we charge depreciation ($7.6 billion in fiscal 2026, with servers written off over six years) as the cost of keeping existing capacity running. We excluded $4.6 billion of customer prepayments and a $2.7 billion gain on selling its stake in Ampere. On that basis Oracle earned about $15.4 billion for its owners in fiscal 2026, or $5.29 per share, up 10% from $4.81. We take our starting point as the middle of the four years since the Cerner acquisition (fiscal 2023 to 2026): $4.54 per share. We left out fiscal 2022, which included $4.7 billion paid to Hewlett Packard Enterprise over a lawsuit, and fiscal 2018, which was distorted by the one-time US tax reform charge. Base case, $89.60 per share. The long-standing software business keeps earning about $4.54 per share and does not grow. Flat is a fair middle ground between growing applications and shrinking license sales. We assume the AI contracts deliver about 80% of the scheduled revenue on time, with the rest delayed, and that each dollar of that new revenue keeps about 12 cents for owners once depreciation, the new leases, interest on the added debt and taxes are paid. That is below the roughly 16 cents Oracle kept on its extra revenue in fiscal 2026, because most of the lease costs have not started yet. Earnings dip to $4.87 per share in fiscal 2027 as leases begin before the revenue arrives, rise to about $7.96 in fiscal 2030 and 2031, and then fall back as the contracts run off. Once the contracts end, we assume the capacity is rented again at prices that just cover its costs. Bear case, $46.24 per share. Oracle warns in its filings that losing one or more key customers, or a key customer becoming insolvent, could hurt results and leave it paying for extra data-center space and financing with no revenue to match. In this case the build-out runs late and earns little, then around 2030 a large customer stops paying. Oracle is still bound to its 15-to-19-year leases and the added debt, which cost about $6 billion a year more than the idle capacity brings in, and the legacy business shrinks 2% a year for a decade. Even so, the software franchise keeps the business worth more than it owes. Bull case, $183.31 per share. The contracts are delivered on schedule, each dollar of new revenue keeps about 20 cents, the capacity is rented again on similar terms for the life of the leases, and the software business grows 3% a year for ten years as cloud applications gain. All cases discount owner earnings at 6%. Debt is not subtracted separately because interest is already paid out of earnings; its risk sits in the bear case. What would make this wrong: Oracle does not disclose what its large AI contracts earn or who the customers are, so the 12-cent base margin is our judgement from recent results, not a disclosed figure. The filings also do not show how much interest was added to the cost of construction rather than expensed. Slow data-center construction, more share sales or a failing key customer would push value toward the bear case. Contracts that are delivered and renewed at today's margins would push it toward the bull case.