Can Oracle Cloud Drive Major Stock Gains This Year

Oracle tumbled after leaked internal documents revealed dramatically lower cloud profit margins than Wall Street anticipated. Yet analysts at Mizuho see this as a buying opportunity, arguing the market overreacted to what they consider an expected phase of AI infrastructure buildout. The stock recovered partially, closing down just 2.5% after initially plunging 7.1%, and traded up 1% the following session.

Internal documents obtained by The Information exposed Oracle's cloud economics in stark detail. During the three months ending in August, Oracle generated approximately $900 million in revenue from renting Nvidia-powered servers. The gross profit? A mere $125 million translating to margins below 14%.

This revelation shocked investors who had assumed Oracle's AI cloud business commanded premium margins. In some cases involving smaller chip quantities, Oracle actually lost money on rentals. For a company that's become synonymous with high-margin enterprise software, these numbers represented a jarring departure from expectations.

The stock initial 7% drop reflected genuine concern about Oracle's ability to monetize its massive infrastructure investments profitably.

Why Analysts Aren't Panicking

Mizuho analysts published a note Wednesday dismissing the margin concerns as predictable growing pains. "This simply raises debates we've already discussed," they wrote, emphasizing that the near-tripling of sales coupled with modest gross profit improvement matched their forecasts exactly.

The bank maintains its "Outperform" rating with a $350 price target implying 23% upside from current levels. Their thesis rests on a fundamental premise: early-stage AI businesses naturally operate at compressed margins that expand over time.

The leaked data showing margins between 10% and slightly above 20% actually supports Mizuho's projection that Oracle will eventually achieve 25% gross margins in this segment. Oracle's traditional cloud infrastructure business followed the same trajectory, starting with thin margins that improved as scale economics kicked in.

Oracle has dramatically improved its operational execution, a factor the market appears to have overlooked. Management recently confirmed they've reduced GPU cluster delivery time to customers to just one week, a massive improvement that accelerates monetization and minimizes the margin drag from idle chips.

Every day that expensive Nvidia chips sit unproductive represents lost revenue and margin erosion. Oracle's ability to get these assets earning returns within seven days represents a competitive advantage that should translate directly to improving profitability.

This operational excellence matters enormously in a capital-intensive business where efficiency separates winners from losers.

Wall Street Verdict

The analyst community remains largely bullish despite the margin revelation. Of 45 analysts covering Oracle, 30 rate the stock "Buy" or equivalent, 14 assign "Hold" ratings, and only one, Alex Heissel at Rothschild & Co Redburn, who initiated coverage just last week rates it "Sell."

Guggenheim analyst John DiFucci defended Oracle's strategy, explaining that while margins start low as revenues ramp, the company wouldn't sign deals failing to deliver at least 25% gross margins across the contract lifetime. "Oracle has become the de facto standard for AI training workloads because it delivers better performance at lower cost," DiFucci said, maintaining his "Buy" rating.

The key distinction: Oracle's competitive pricing stems from operational efficiency, not desperation. The company can charge less while still earning comfortable profits a position of strength, not weakness.

Oracle has surged approximately 70% this year on surging AI demand driving revenue growth. Last month, the company forecast cloud revenue would jump 700% over the next three fiscal years a projection that sent shares soaring 36% in a single session, one of the stock's strongest trading days ever.

These aggressive growth targets reflect management's confidence in capturing AI infrastructure spending as enterprises race to build machine learning capabilities.

Success means investors who bought Tuesday's dip captured exceptional value. The 23% upside projected by Mizuho would represent significant outperformance for a large-cap technology stock.

Failure means the margin disclosure represents an early warning signal the market initially dismissed. If Oracle cannot improve profitability while maintaining growth, the current valuation multiple becomes indefensible.

Trading Implications

Oracle presents a classic tension between near-term margin pressure and long-term AI positioning. The leaked margin data removes the bullish case's veneer of inevitability Oracle must now prove it can scale profitably, not just rapidly.

The stock's 70% year-to-date gain already prices in substantial AI success. Any execution stumbles or further margin disappointments could trigger sharp corrections. Conversely, evidence of margin expansion in coming quarters would validate the bull thesis and likely drive shares higher.

Options markets reflect this uncertainty, with elevated implied volatility suggesting traders anticipate continued price swings around earnings reports and AI infrastructure updates.

The margin revelation crystallizes Oracle's fundamental question: Can the company monetize AI infrastructure at scale? Mizuho's 23% upside target assumes yes. Skeptics see a company sacrificing profitability for market share in a crowded, capital-intensive business.

Traders should monitor quarterly margin trends, GPU deployment efficiency metrics, and customer acquisition costs as key indicators of whether Oracle's AI infrastructure bet will pay off or prove a cautionary tale about growth-at-any-cost strategies in emerging technology markets.

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