Oracle (ORCL)

Total return at 5 years: 12.1%/year = 10.6% appreciation + 1.6% dividend. The target price ($227) is ex-dividend; the $13 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $230 · Multiples $194) exceeds the market price ($137).

Today — fairly valued: at $137 trades ~29.1% below its value discounted to today (~$194); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($227) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$122.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($137) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (4.6%/year) than we project (15.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$23.1 bn of owner earnings in year 5 (vs ~$37.1 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT (el flujo de caja libre es negativo por el capex de OCI). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid over the trailing twelve months ended August 31, 2026: Oracle files a 10-Q, so year-0 is built by levels from fiscal 2026 plus the first quarter of fiscal 2027 (revenue US$71.8bn, operating income US$23.1bn, margin 32.1%; XBRL). Year 1 is anchored on guidance, not on the trailing trend: the company guides revenue of at least US$90,000 million and non-GAAP earnings per share of US$8.10 for fiscal 2027, with the second quarter growing 30% to 34%. Built by levels, the following twelve-month window is the three remaining quarters of the guided fiscal year plus the first of the next: US$95.8bn, i.e. +33.5%. The path decays smoothly down to 11% by year 5, supported by the US$664,000 million of unrecognized contracted revenue (US$209,000 million more than a year earlier), of which only a fraction is recognized within twelve months. Operating margin compresses from 32.1% to 28% as the mix shifts toward infrastructure, which is more capital-intensive and thinner-margin than traditional software. ⚠️ Free cash flow is deeply negative — negative US$28.7bn: operating cash flow US$46.9bn against capex of US$75.7bn — and the model shows it explicitly rather than hiding it, which is why valuation runs on EV/EBIT on operating income, which is solid. Year-0's operating cash margin (65.4%) sits above its structural level because the quarter carries advance collections from AI cloud contracts; the path returns to 47%-52%. The buildout is no longer funded by debt alone: in the first quarter of fiscal 2027 the company sold US$20,000 million of common stock under an at-the-market program, taking the share count from 2,880 to 3,024 million (+5.0%) and lowering debt from US$129.5bn to US$125.3bn, with cash falling from US$55.4bn to US$36.4bn. The 6.50% Series D mandatorily convertible preferred (US$4,954 million) remains outstanding and enters as a claim in the bridge, not in the share count, because the base case's terminal value falls within the contract's band. Watch: the malinvestment test (does the thin-margin infrastructure capex earn its cost of capital?), conversion of contracted revenue into margin, and whether the share issuance keeps diluting faster than earnings grow.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $227 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $137, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $227 in 5 years plus $13 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $194. Against the current market price ($137), the margin of safety is 29.1% (trades below the maximum → there is margin) and the total return at that price would be 12.1% annually.

• EV/EBIT (free cash flow is N/M). Free cash flow is −$28.7bn from capex → valued on EV/EBIT (operating income $23.1bn, growing), showing the burn explicitly. EV/FCF is not used.
• Correction already happened. From ~$213 in June to $137 — the market took out much of the "perfection" premium; at $137 it trades at ~22× operating income.
• Enormous dispersion. The value is a binary bet on OCI's economics: if it scales profitably, there is upside; if it is malinvestment, downside — the bear/bull range is very wide.
• The leverage amplifies. With $125.3bn of debt, equity is a leveraged slice of enterprise value — a shift in the multiple or in OCI's margin is magnified in the per-share value.
• Margin of safety at the end. At $137 the base return (+12%) is around the market's average return; there is no wide margin of safety — the margin would have to come from OCI beating the base.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✕ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (105%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong cash but consumed. Operating cash flow ($46.9bn) is strong, but capex ($75.7bn) consumes it entirely → free cash flow −$28.7bn. The cash is there; the capex eats it.
• Return on capital. Historically high in the database; OCI's incremental (the AI capex) is the open question of the malinvestment test — still unproven.
• Valuation metric. Free cash flow is negative → not usable for valuation; EV/EBIT is used instead (operating income $23.1bn is solid and growing), showing the cash burn explicitly.
• Stock-based compensation. SBC (~$4.8bn) is ~7% of revenue → it is expensed in operating income; moderate, not the main distortion.
• Rising depreciation. Depreciation almost doubled ($3.9bn → $7.6bn) because the OCI data centers are coming into service — a preview of the burden that OCI must make profitable.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Oracle's growth is anchored on RPO (contracted backlog), which jumped from $138bn to $664bn on mega AI cloud contracts — signed revenue that advances OCI's ramp, though only 12% is recognized within 12 months (a long, concentrated backlog). The investment engine is data-center capex, which exploded to $75.7bn (+162%) and drives free cash flow to −$28.7bn: the malinvestment test (§3) is whether that deployment, funded with debt and at ~16% gross margin on AI contracts, earns its cost of capital. The frozen dividend signals that cash is going to the buildout.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real growth, not nominal. Yes — revenue +17% (+16% at constant currency) on the OCI ramp, not on a currency effect.
• Where the engine comes from. The cloud (51% of revenue) and OCI (+76%, 84% of cloud growth); the mature database anchors the cash. The engine is OCI.
• Anchored in contracted backlog. The $664bn RPO is signed revenue, but only 12% is recognized within 12 months — long and concentrated, not a fast conversion.
• Realistic deceleration. The base decelerates from +17-20% toward ~+10% by the fifth year; the backlog supports the near-term ramp, but the law of large numbers and competition bite.
• Return on the growth. OCI's growth is low-margin (~16% gross) and capital-intensive — revenue grows but the margin compresses and it consumes cash; the quality of the growth is the doubt.

• Relevant in 10 years / recurrence. The mission-critical database and AI compute are structural; the unknown is OCI's profitability, not its relevance.
• Market share / cost. Historical leader in the enterprise database (deep moat); an aspirant in cloud infrastructure (OCI), where it competes with larger-scale hyperscalers.
• Pricing power. Strong in the database (~70% margin, near-universal renewal); thin in OCI (~16% gross margin on the AI contracts) — the mix compresses the consolidated margin.
• Operating leverage. In the database it is high; in OCI it is capital-intensive (data centers), which inverts the logic: growth consumes cash before generating it.
• Capital cycle / malinvestment. The central risk (§3): OCI's capex ($75.7bn) is drawing massive capital into the AI cloud; if the incremental return does not exceed the cost of capital, it is malinvestment no matter how contracted the backlog is.
• Backlog concentration. The $664bn RPO is dominated by a handful of AI customers; their ability to pay is the disconfirmer — the 10-K warns of impairment if they fail to perform.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 2.8x
• !Interest coverage (EBIT / interest)4.5x
• !Liquidity (current ratio)1.38×
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 105% of ROIC
• !Value creation (ROIC − 10% bar)+4pp
• !Malinvestment test (capex vs incremental ROIC)Strong investment mode 8.1x
• –Float / working capitalNeutral WC
• !Dilution (SBC % of revenue + shares)SBC 6.7% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• High and rising debt. $125.3bn of total debt (net debt ~$89bn), +$37bn in the year, with S&P one notch above speculative grade; negative free cash flow requires issuing more. The weak point of the case.
• Negative free cash flow. −$28.7bn from OCI's capex; sustainable only as long as debt access and the backlog hold up. Must turn positive once OCI ramps.
• Positive book equity. Equity recovered to $42.5bn (it was negative), but with high goodwill/intangibles → do not value by P/TBV; the equity is book, not tangible.
• Long maturity profile. The debt matures between 2026 and 2066 (up to $2.75bn out to 2066), well laddered; no immediate wall, but the total load is the risk.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Aggressive reinvestment bet: OCI's capex consumes all the cash flow and more, financed with debt; the buyback collapsed and the dividend was frozen. The return on that bet is the malinvestment test.
• Alignment / skin in the game. Larry Ellison, founder, controls 40.6% — absolute owner alignment, but a company controlled de facto with limited voice for the minority shareholder; 346M of his shares are pledged.
• Leadership transition. Two new co-CEOs (Sep-2025), one aged 39; Catz stepped out of the operating role. Ellison (81) remains the real power — strategic continuity but succession uncertainty.
• Governance / pledges. Ellison's control at 40.6% + 346M shares pledged as collateral for personal debt (the sole exception to the anti-pledging policy) is a governance flag.

• Cyclical correction (bottom after the panic): the stock fell sharply from June 2026 when the market doubted the quality of the OCI backlog — the price already discounts much of the skepticism about the economics of the AI cloud.
• Negative free cash flow (−$28.7bn) from voluntary growth capex scares cash-focused investors, even though operating income ($23.1bn) is growing +17% — the capex depresses the flow but (if the return is real) builds tomorrow's business.
• Leverage weighs on it: with $125.3bn of debt (S&P one notch above speculative grade) and the need to issue more to fund OCI, investors penalize the multiple for balance-sheet and counterparty risk (the AI customers).

The post-correction discount comes from skepticism about OCI's economics (thin margin, concentration, debt), not from a deteriorating business — the database franchise remains intact and the RPO is contracted. But unlike a clear value case, here the source of the opportunity is a binary outcome: if OCI earns its cost of capital, there is value; if it is malinvestment, there is not. The perception-reality discrepancy is not evident in one direction — it is a bet, not a bargain.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -2%/year (-9% total): the margin of safety protects the downside. The bull (+24%/year, +190% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• OCI malinvestment. The central risk (§3): if AI capex ($75.7bn/year, ~16% margin) does not earn its cost of capital, it is malinvestment — with asset impairment if AI demand cools.
• Concentration and payment of the AI customers. The $664bn backlog depends on a handful of giant customers; the 10-K warns of impairment if they fail to meet their contractual obligations.
• Debt and rating. $125.3bn and growing (S&P one notch above speculative grade); a shift in rates or in the rating raises funding costs and limits deployment.
• Competition from the hyperscalers. AWS, Azure and Google Cloud have more scale and capital; OCI competes on price/performance, not on a structural advantage.
• Governance / Ellison's control. Company controlled de facto (Ellison 40.6%, 346M pledged) + transition to two new co-CEOs — limited voice for the minority shareholder.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 14% above the 10% bar, but the margin is limited (+29%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 15% at a multiple/growth of 1.5 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 14% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 5% vs our 15%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -4%/yr, bull-scenario ceiling +22%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, cost advantage, efficient scale, intangibles → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 5%, within what we project (15%) — the story squares with the numbers.