Oracle is poised for substantial growth through its GPU-as-a-service (GPUaaS) operations, yet according to Morgan Stanley’s recent assessment, the company faces considerable financial pressures that leave limited margin for missteps.
In a client note released on Friday, the investment bank outlined that while the GPUaaS sector holds a significant revenue promise for Oracle, the scaling efforts necessary to capitalize on this opportunity are likely to intensify capital needs, complicate funding, and dampen profit expectations.
Analyst Keith Weiss underscored GPUaaS as a major revenue contributor but cautioned that a thorough cross-disciplinary evaluation reveals that the planned buildout "will push earnings per share (EPS) below targets and lead to substantially increased capital requirements." As a result, Morgan Stanley has adjusted its price target for Oracle’s shares downward from $320 to $213, maintaining an Equal-weight rating on the stock.
From an equity market perspective, the firm expressed difficulty in identifying a credible path for Oracle to meet its aggressive EPS targets, a challenge seemingly priced into current share valuations which present a "balanced risk/reward" scenario. However, on the credit front, Morgan Stanley views risk factors as inadequately appreciated by the market.
Weiss recommended strategic credit positioning, suggesting investors consider buying credit default swaps (CDS) and selling benchmark bonds to hedge against unrecognized leverage and funding risk.
The updated Morgan Stanley financial model anticipates notably reduced earnings projections, forecasting fiscal year 2028 and 2030 EPS of $8.51 and $10.02 respectively, figures substantially below Oracle’s own targets of $10.65 and $21.00. This outlook is primarily driven by anticipated slower monetization of GPU services, elevated capital expenditures, and rising costs related to financing.
Capital demands are expected to escalate significantly, with Morgan Stanley estimating cumulative cash capital expenditures between fiscal years 2026 and 2028 of $275 billion, which markedly exceeds consensus forecasts at $189 billion. The bank also projects Oracle’s gross adjusted debt to surpass $400 billion and leverage ratios to exceed five times EBITDA by fiscal 2028, highlighting substantial funding requirements and increasing risks related to credit ratings.
Investors considering Oracle must weigh these financial challenges against the potential rewards from growth in the expanding GPUaaS market segment. The risk assessment impacts not only equity holders but also creditors and the broader technology sector valuation outlook, given Oracle’s size and influence in cloud infrastructure services.
Morgan Stanley highlights both the promising revenue potential in Oracle's GPU-as-a-service (GPUaaS) business and considerable financial hurdles tied to its expansion. The investment bank has lowered its price target and flagged increased capital expenditures, slower profit growth, and heightened leverage as key concerns impacting Oracle’s financial outlook and credit risk profile.
Key Points
- Oracle’s GPU-as-a-service business offers a noteworthy revenue growth opportunity that underpins part of the company’s strategic expansion.
- Morgan Stanley has revised its earnings forecasts downward due to anticipated slower revenue ramp-up, increased capital expenditure, and higher financing costs associated with GPUaaS buildout.
- The forecasted leap in funding needs and leverage ratios poses intensifying credit risk, prompting recommendations for credit market strategies such as buying CDS and selling bonds.
Risks
- The substantial capital expenditure required for GPUaaS expansion may pressure Oracle’s financial resources and reduce profitability margins.
- Slower-than-expected monetization of GPUaaS could hinder Oracle’s ability to meet or exceed its EPS targets over the next several years.
- Rising debt levels and leverage ratios heighten rating risks and credit market vulnerability, with spreads currently not fully pricing in these concerns.