Oracle's stock has fallen by a third. Why Bernstein considers it a top pick for AI

Bernstein recommends buying Oracle stock, believing it should be among the first options investors consider, according to MarketWatch. The market is underestimating the potential return on the company’s large-scale investments in AI infrastructure, the bank explains. In its view, OpenAI’s IPO next year and Oracle’s expected return to positive free cash flow could drive the stock higher. On November 11, the company’s stock jumped nearly 9% on the back of strong quarterly results from the cloud-native company CoreWeave, but fell 2% in premarket trading on Thursday amid volatility in the tech sector.

Bernstein analyst Mark Merdler believes that shares of cloud computing provider Oracle should be one of the top choices for investors betting on AI. He reaffirmed his “buy” recommendation and expects the stock to rise to $325—a 153% increase from the closing price on November 11. However, the analyst notes that investors fear the development of AI infrastructure could turn out to be a bubble, that data centers may fail to deliver high economic returns, and that Oracle’s largest AI clients may not become profitable.

Merdler sees two potential drivers for the hyperscaler’s stock growth. The first is OpenAI’s anticipated IPO, which could take place next year. It will shed significant light on how the AI giant—one of Oracle’s largest customers—will be able to pay for the computing power it has committed to purchasing.

Investors view the outlook for Oracle’s stock as largely dependent on the fate of OpenAI, MarketWatch explains. The ChatGPT developer accounts for about $300 billion of Oracle’s $664 billion in remaining performance obligations (RPO). This metric reflects the value of services the company has committed to providing to customers under signed contracts but has not yet delivered or recognized as revenue. According to Merdler, once OpenAI publishes its IPO prospectus, uncertainty regarding the AI company’s ability to fulfill these obligations to Oracle should diminish.

According to Merdler, the second, longer-term driver of growth will be Oracle’s return to positive free cash flow in the second half of the next fiscal year, which ends in May 2028. Oracle’s management presented this forecast at an investor day in October. According to FactSet, analysts had expected Oracle’s free cash flow to remain negative during that period, MarketWatch notes.

In his model, Merdler factors in a “decrease in Oracle’s need” to raise capital. He noted that at the investor conference, the company announced its intention to “limit” additional capital raising through the end of fiscal year 2030 to no more than $10 billion through equity offerings and $10 billion through debt financing. According to Merdler, Oracle will be able to achieve its free cash flow target.

Since the beginning of the year, Oracle's stock has lost 34% of its value. Merdler believes that as new financial results are released in the coming quarters, the company's stock price should "rebound."

Merdler isn’t the only one who is optimistic about Oracle’s prospects. According to MarketWatch, 36 out of 43 analysts covering the stock recommend buying it. Six recommend holding the company’s stock in their portfolios, and only one recommends selling. Wall Street’s average price target is $244.1, which implies 90% upside potential.

This article was AI-translated and verified by a human editor