Written by: Rita

Oracle is evolving from a traditional software company to the world's fourth-largest cloud infrastructure service provider.

On September 2, Bernstein released a report indicating that Oracle's OCI Gen 2 achieved revenue of $18.1 billion in FY26, a year-on-year increase of 77%, with growth accelerating from the 50% in FY25. IDC has surpassed Alibaba Cloud, ranking just behind AWS, Azure, and Google Cloud. Bernstein maintains an "Outperform" rating with a target price of $325, indicating a 130% upside from the current stock price. Market concerns about OCI's profitability and cash flow are excessive; Oracle's core businesses (Database, Fusion ERP, NetSuite) are generating strong cash flows sufficient to support the capital expenditures of AI data centers.

OCI surpasses Alibaba Cloud, growth rate continues to lead the industry

OCI is Oracle's fastest-growing business segment. FY26 revenue reached $18.1 billion, a year-on-year increase of 77%. The growth rates for AWS, Azure, and Google Cloud during the same period were 18%, 28%, and 34%, respectively. The revenue scale of OCI is still smaller than the top three, but the growth rate difference indicates that market share is rapidly catching up.

OCI's growth is accelerating. FY25 growth rate was 50%, rising to 77% in FY26, and management expects further acceleration in FY27. Bernstein believes that growth is driven by three factors: large-scale deployment of AI data centers, an explosion in sovereign cloud demand, and ongoing advancement of multi-cloud database strategies.

Core business cash flow supports investment

The intensity of capital expenditure for Oracle's AI data centers is the biggest point of contention. FY26 capital expenditures are expected to be $55.6 billion, followed by $92.8 billion in FY27, and $97.6 billion in FY28. The market is concerned about investment returns and cash flow pressure.

Bernstein believes that the market has overlooked Oracle's ability to generate cash flow from its core business. In FY26, software revenue is expected to reach $58.5 billion, a year-on-year increase of 19%, with cloud business accounting for 58%, up from 50% in FY25. SaaS revenue reached $15.9 billion, with a year-on-year increase of 11%; PaaS/IaaS revenue reached $18.1 billion, with a year-on-year increase of 77%. SaaS and database business profit margins are much higher than OCI, providing a stable source of cash.

The operating profit for FY26 is projected to be $28.9 billion, a year-on-year increase of 15.5%, with an operating margin of 42.9%. Bernstein predicts that FY27 operating profit will increase to $37.9 billion, with a profit margin of 42.0%, remaining at a high level.

Growth segment ratio rises to 38%, structure continues to optimize

Bernstein breaks down Oracle's software revenue into three categories: growth, stable, and declining. In FY26, growth revenue accounted for 38% (up from 33% in FY24), stable revenue for 40% (down from 44% in FY24), and declining revenue for 22% (down from 24% in FY24). The growth segment is expanding, while the declining segment is shrinking, indicating structural optimization.

The core driver of growth revenue is OCI Gen 2 and strategic back-office (ERP/HCM). FY26 strategic back-office revenue is about $9.9 billion, a year-on-year increase of 15%, with Fusion ERP at about $4.3 billion (+15%), NetSuite at about $4.2 billion (+13%), and Fusion HCM at about $1.4 billion (+21%). Growth rates have slowed compared to previous years, but remain higher than the company's overall growth rate.

Stable revenue focuses on databases, including traditional on-premises databases and cloud database services. Bernstein estimates that cloud database service revenue for FY26 is about $3 billion, making it an important growth source within OCI aside from AI data centers.

AI data centers contribute $6.6 billion, strong growth in non-AI sovereign cloud

Bernstein estimates that Oracle's AI data center-related revenue in FY26 is approximately $6.6 billion, accounting for 36% of total OCI revenue. Sovereign cloud is another underrated growth engine, as governments around the world want to operate cloud services within their own borders, and Oracle has a differentiated advantage with its unique "white-label" sovereign cloud architecture.

The multi-cloud database strategy (Oracle Database@AWS, @Azure, @Google Cloud) is bringing database customers into cloud environments, enabling Oracle databases to run on competitors’ clouds, thereby creating incremental revenue sources for OCI.

In terms of capital expenditures, Oracle adopts a flexible strategy. AI data center contracts are non-cancelable, but the pace of hardware procurement can be managed. The company can purchase servers and cooling equipment only after the data centers are delivered, avoiding premature use of funds. At the end of FY26, Oracle's cash balance is about $31.3 billion, combined with operating cash flow and debt financing capabilities, the funding gap is smaller than the market is concerned.

Bernstein's core judgment is: Oracle is using the profits from its core business to fuel its cloud expansion, evolving from a software company into an infrastructure company. OCI's scale has surpassed Alibaba Cloud; if growth continues, the time to catch up with Google Cloud may be shorter than the market expects. The target price of $325 corresponds to an adjusted P/E ratio of about 25 times for FY28.

Disclaimer

This article is an organization and interpretation of third-party brokerage research reports (Bernstein, September 2, 2026) by Chao Xiang Research, combined with the organization of public market information. The ratings, target prices, earnings forecasts, and related judgments cited in the article are the views of the analysts of that brokerage and only represent the position of their associated institution, not the views of Chao Xiang Research, nor do they constitute any investment advice.

The market is risky, and decisions should be independent. This article should not be used as the basis for buying or selling any securities.