Is ORCL Stock a Buy, Sell or Hold at an EV/EBITDA Multiple of 21.89X?

Oracle’s ORCL stretched valuation metrics promote compelling reasons why investors should consider selling the stock in 2025. Oracle currently trades at an elevated EV/EBITDA multiple of 21.89x, significantly higher than the Zacks Computer-Software industry average of 16.41x. This premium valuation suggests that investors have already priced in substantial future growth, creating a potentially dangerous situation where even slight underperformance could trigger significant downside movement.

ORCL’s EV/EBITDA TTM Ratio Depicts Premium Valuation

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While Oracle has outperformed the broader market with a 25.8% gain over the past six months against the Zacks Computer and Technology sector's 4.9% and the S&P 500's 6.4% gain, respectively, this impressive run has pushed the stock's valuation to levels that may be difficult to sustain.

6-Month Price Performance

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Growth Acceleration Already Priced In

On the recent second-quarter earnings call, CEO Safra Catz highlighted that Oracle expects cloud revenues to reach $25 billion this fiscal year, with impressive growth in Oracle Cloud Infrastructure (“OCI”) revenues, indicating an increase of 52% year over year. The company also reported that GPU consumption increased 336% in the quarter, reflecting strong AI-related demand.

However, these growth metrics appear largely priced into the current valuation. With capital expenditures expected to double in fiscal 2025 compared to 2024, as stated by Catz during the earnings call, profit margin expansion may face headwinds in the near term.

Competitive Pressures in Cloud Infrastructure

Despite Oracle's impressive 52% growth in OCI, the company remains a smaller player compared to hyperscaler giants like Amazon AMZN-owned Amazon Web Services, Microsoft MSFT Azure, and Alphabet GOOGL-owned Google Cloud. Oracle's multi-cloud partnerships with these competitors, while beneficial for database migrations, also highlight its dependent position in the broader cloud ecosystem.

The company's remaining performance obligation (RPO) grew 50% to $97.3 billion, which shows strong future revenue visibility. However, with approximately 39% of total RPO expected to be recognized as revenues over the next 12 months, the growth curve beyond the initial recognition period becomes less certain.

ORCL Free Cash Flow Challenges

Oracle's trailing 12-month free cash flow was $9.5 billion, with a concerning trend showing a 6% decline in the most recent quarter despite operating cash flow increasing 19%. This divergence is primarily due to significantly higher capital expenditures, which reached $4 billion in the second quarter alone. As the company continues to invest heavily in data center expansion, free cash flow may remain under pressure.

SaaS Growth Deceleration

While the company's SaaS revenues grew 10% in the second quarter, this represents a slower pace compared to infrastructure growth. The Cloud Application (SaaS) segment generated $3.5 billion in revenues, but the slower growth rate indicates potential market saturation or intensifying competition in the enterprise application space.

The Zacks Consensus Estimate for ORCL’s fiscal 2025 revenues is pegged at $57.65 billion, indicating year-over-year growth of 8.85%. The consensus mark for fiscal 2025 earnings is pegged at $6.22 per share, unchanged over the past 30 days. The figure indicates year-over-year growth of 11.87%.

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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

ORCL AI Investment Returns Remain Uncertain

Oracle has made substantial investments in AI infrastructure, including the delivery of what it calls "the world's largest and fastest AI supercomputer, scaling up to 65,000 NVIDIA H200 GPUs." While Chairman Larry Ellison emphasized the company's leadership in AI workloads, the return on these significant capital investments remains uncertain in an increasingly competitive AI infrastructure landscape.

Conclusion: Time to Take Profits

While Oracle's cloud transformation has shown impressive progress, the current valuation appears to have gotten ahead of fundamentals. With an EV/EBITDA multiple of 21.89x, slowing free cash flow growth, and substantial capital expenditures ahead, investors would be wise to consider taking profits in 2025.

The stock's premium valuation leaves little room for execution missteps, and as competition intensifies in both cloud infrastructure and applications markets, maintaining current growth rates will become increasingly challenging. For investors who have benefited from Oracle's recent outperformance, 2025 presents an opportune time to reassess exposure and potentially reduce positions in favor of more attractively valued opportunities in the technology sector. ORCL currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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