Bank of America: Oracle's expansion financing needs are below expectations, but cash flow improvement still lies beyond a period of heavy investment

Why is less new financing needed for the expansion?

Oracle management plans to add 7 gigawatts of data center capacity through 38 projects over the next three years. It expects to require 10 billion dollars in new equity financing and 10 billion dollars in debt financing, totaling 20 billion dollars, below the market estimate of approximately 50 billion dollars.
An important source of the difference is arrangements such as customer prepayments, vendor financing and customer-provided hardware. These share the funding burden of construction, reducing the need for new equity and debt financing below previous outside estimates.

The company expects free cash flow to turn positive in the second half of fiscal 2028, a year earlier than Bank of America previously expected. It expects free cash flow to exceed 30 billion dollars in fiscal 2029, compared with a market expectation of an outflow of 1 billion dollars cited in the report.
Substantial investment remains before free cash flow turns positive. Bank of America raised its fiscal 2028 capital expenditure forecast from approximately 105.8 billion dollars to 148.2 billion dollars and expects full-year free cash flow outflows of approximately 30.4 billion dollars and 14.4 billion dollars in fiscal 2027 and 2028, respectively.
The company says the data center business has a direct operating profit contribution margin of approximately 34% and a return on investment over the full infrastructure lifecycle of 28%. These segment economics are not directly comparable with the company's overall margins.

Bank of America is optimistic about growth in cloud infrastructure and applications: approximately half of ERP customers still use on-premises deployments, and migration to the cloud can generate approximately 3 times the revenue. Cross-selling applications as well can bring revenue to approximately 9 times the original level, while AI products can provide additional opportunity.
Bank of America raised its fiscal 2028 revenue forecast from 131.2 billion dollars to 132.8 billion dollars, forecasting year-on-year growth of 46.3%. Within that total, cloud revenue is expected to rise from 34 billion dollars in fiscal 2026 to approximately 100.1 billion dollars in fiscal 2028.
Accelerating revenue is accompanied by margin pressure: Bank of America expects the overall gross margin to fall from 67.1% in fiscal 2026 to 53.4% in fiscal 2028, and the operating margin to fall from 42.9% to 37.8%. The company has set targets of 225 billion dollars in revenue and an operating margin of 40% for fiscal 2030.

Bank of America maintained its buy rating and 240 dollar price target, based on a forward price-to-earnings multiple of 26.5 times for calendar 2027, above the 19 times multiple for large software and cloud data center peers. The bank believes accelerating growth and an expanding order backlog support the premium.
Data center construction delays, a decline in enterprise software spending, and the impact of innovative AI laboratories on the long-term value of software are among the downside risks to the price target listed by Bank of America.