The Financial Times reported that Blue Owl Capital, a seasoned investor in Oracle’s ORCL data center projects, is backing off from the company’s latest USD 10 billion buildout in Michigan.
Why it matters: Recent media coverage of Oracle’s data center buildout has amplified investor concerns, obscuring the progress the company has made toward becoming a major cloud infrastructure provider. Shares are down over 45% from October highs, which we view as an overreaction to artificial intelligence investment risks.
- We see investor concerns with the unprecedented scale of Oracle’s ambitious data center expansion. Specifically, an elevated level of liability leaves little room for error, meaning the new data centers have to generate cash flow as soon as possible to service debt and lease obligations.
- However, we view recent events, including delays in some data centers’ completion dates, as minor setbacks that should not alter Oracle’s overall capacity ramp-up. We still see ample demand for AI-related data centers, which should allow Oracle to handle what we estimate will be capital expenditures averaging over USD 80 billion annually over the next five years.
The bottom line: Upon further review of our assumptions for wide-moat Oracle, we trim our fair value estimate to USD 277 per share from USD 286, primarily due to a higher cost of debt associated with its data center buildout. We also raise our Uncertainty Rating to Very High from High.
- While we continue to view shares as undervalued, recent updates to Oracle’s data center projects led us to believe the range of long-term, potential outcomes may be broader than we originally projected, leading to our increase in the uncertainty rating.
- Complete delivery of remaining performance obligations, which stood at USD 523 billion, can lead to further upsides to our fair value, while extended project delays and lack of confidence from financiers could lead to a worsening revenue outlook, presenting downside to our fair value.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
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