A Detailed Explanation of the “Growth Model” in Oracle

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Oracle is transforming from a traditional software vendor into a GPU data center operator, holding a dominant position in the market by securing large-scale contract orders from clients such as OpenAI, Meta, and xAI.

According to a report released on September 23 by Morgan Stanley analysts Keith Weiss and Jamie Reynolds, as reported by Zhuifeng Trading Desk, this transformation will reshape the company's revenue structure, profit margins, and risk dynamics. It is expected that by fiscal year 2030, AI-related business will contribute 60% of its total revenue.

This judgment is based on Oracle's recently published astonishing performance guidance. According to Morgan Stanley's analysis, Oracle expects revenues from its cloud infrastructure (OCI) business to expand from about $18 billion in fiscal year 2026 to $144 billion in fiscal year 2030. According to Morgan Stanley's growth framework analysis, achieving these targets means OCI will account for 72% of revenue in fiscal year 2030, a significant increase from 17% in fiscal year 2025.

Although revenue is expected to achieve a 28% annual compound growth rate, this GPU-centric AI-as-a-Service (GPUaaS) model also brings Oracle unprecedented capital expenditure pressures and margin erosion risks. The analysts maintained an "equal weight" rating on the stock, with the core view that although the growth prospects are very promising, this expectation has largely been priced into the current stock price.

AI Business Dominates, Reshaping Revenue Structure

Oracle's new growth model is centered on the explosive growth of AI infrastructure-as-a-service (IaaS) within its OCI business. According to Morgan Stanley's calculations, to achieve the target of $144 billion in total OCI revenue by fiscal year 2030, revenue from AI IaaS needs to reach about $121 billion.

This means that the proportion of AI IaaS in Oracle's total revenue will jump from about 5% ($2.6 billion) in fiscal year 2025 to 60% in fiscal year 2030. This marks Oracle's transition from a database and enterprise application software giant to a GPU data center operator.

The key driver of this ambitious blueprint is the ultra-large-scale contracts Oracle has already secured. The report notes that this expectation is supported by a total contract value agreement of up to $300 billion signed with OpenAI. Meanwhile, Oracle management expects new bookings in the coming months to push the company's remaining performance obligations (RPO) to over $500 billion, providing extremely high revenue visibility for the medium and short term.

High Capital Expenditure and Financial Pressure

To meet AI clients' demand for large-scale GPU clusters, Oracle must make massive and ongoing capital investments. According to Morgan Stanley estimates, Oracle's total capital expenditures (including finance leases) required for the five years from fiscal year 2026 to 2030 will reach as high as about $405 billion, far exceeding previous expectations.

Such a huge scale of investment will put significant pressure on the company's financial condition. The report predicts that Oracle's total debt and lease obligations will climb from about $109 billion at the end of fiscal year 2025 to about $252 billion in fiscal year 2028. Its leverage ratio (total debt & leases / EBITDA) is expected to remain above 3x before fiscal year 2028.

Although Oracle management expects to disclose more details about financing plans at the analyst day on October 16, Morgan Stanley has already provisionally included the interest expense burdens from increased debt issuance and finance leases in its earnings forecasts.

Margin Pressure: The Price of Growth

The shift to AI IaaS business brings rapid revenue growth, but also causes structural changes in profit margins. Compared with Oracle's traditional software business, which has a gross margin of over 90%, the capital-intensive GPUaaS business has much lower profit margins.

Morgan Stanley's model assumes that Oracle's AI IaaS business can achieve a 40% gross margin after scaling. Even so, as this low-margin business rapidly increases its share in the revenue structure, the company's overall operating margin will be eroded. The report predicts Oracle's non-GAAP operating margin will decline from about 44% in fiscal year 2025 to about 38% in fiscal year 2030.

This means investors must accept a new profit model: sacrificing part of the margin for extremely rapid revenue growth. The success or failure of this model will depend greatly on whether Oracle can achieve significant operational cost efficiency improvements while scaling up.

Valuation Full? Analyst Cautious Judgement

Taking into account both high growth and high investment, Morgan Stanley forecasts that Oracle is expected to achieve about $16.50 non-GAAP EPS in fiscal year 2030, translating to a compound annual growth rate of over 20% from 2025 to 2030.

However, analysts believe the market has already reacted in advance. At press time, Oracle's stock price was trading at around $313. Morgan Stanley values Oracle's fiscal year 2030 EPS using a Microsoft-like P/E ratio of 25x and discounts it back to 2027 at an 8.7% weighted average cost of capital (WACC), resulting in a target price of $320, basically in line with the current stock price.

The conclusion of the report is that Oracle's AI-driven growth story is very attractive, but its stock price has already reflected most of the optimistic expectations. The potential for future stock price appreciation will mainly depend on two variables: whether AI IaaS gross margins can exceed the expected 40%, and the degree of improvement in operating leverage as the company pursues revenue growth. Any performance above or below expectations in these two areas could cause significant stock price fluctuations.

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