Oracle's most pessimistic assumption: If all AI data center contracts are terminated

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In response to ongoing market concerns over customer concentration and capital expenditures, Bernstein conducted an extreme scenario stress test on Oracle in its latest report: If AI clients like OpenAI completely cancel their orders, what is the company's valuation?

According to ZF Trading Desk, the report's model builds an "almost worst-case" downside assumption: all AI contracts signed since Oracle’s Q4 FY2025, including OpenAI's massive order, fail to materialize as revenue, with clients neither performing nor renewing. Meanwhile, core database, SaaS, and non-AI OCI businesses maintain normal growth.

In this extreme scenario, Bernstein estimates Oracle’s valuation floor at $137 per share, only about 15% below the current level of $160, offering investors a clear safety margin. Under an optimistic scenario with smooth execution, the target price could reach $313 per share.

The conclusion shows a strong asymmetry. Even if all AI-related revenue is removed, Oracle’s core enterprise business alone can still support a solid valuation. Bernstein believes that market concerns regarding AI client dependence and capital expenditure pressure have been overly priced in, and the current risk-reward profile is attractive.

$248 Billion Leasing Liabilities Are Not an “Unbearable Burden”

Bernstein further breaks down market concerns over Oracle's massive data center leasing contracts. The scenario investors fear most is if clients default, Oracle would be forced to bear up to $248 billion in idle costs. However, the report points out this risk is grossly overestimated.

Firstly, these leases have terms of 15 to 19 years, with capacity coming online in batches through FY2030. The peak annual risk exposure is actually only $13 to $16.5 billion, and that peaks in 2030. Secondly, as long as the world does not enter an “AI winter,” demand for data centers will remain high, and Oracle can use or sublease any idle space.

More importantly, even putting generative AI aside, the global IaaS/PaaS market already has a potential size of $1.2 trillion to $1.4 trillion. Traditional enterprise cloud migration requires enough data center capacity to absorb these leased spaces. In other words, Oracle’s long-term contract structure provides a robust buffer, and market panic over its capital commitments lacks substantial grounds.

Hardware Risk Is Manageable—Won't Be Trapped by GPU Inventory

Addressing hardware capital expenditure risks, Bernstein points out actual exposure is very limited. Purchases of servers and GPUs typically occur 3 to 6 months before capacity goes live, so if a client cancels, Oracle can flexibly cancel or delay orders before delivery, without incurring major penalties.

Even after hardware delivery, most computing assets like storage, networking, and memory devices remain highly universal, and can be seamlessly redeployed for traditional SaaS and OCI businesses. The report further estimates each $1 of annual AI revenue corresponds to about $2 to $2.5 of computing assets, with a 6-year lifespan, which means even if clients default, at most only 1 to 2 years of computing expenditures are at risk. Overall, the sunk risk of hardware capital expenditures is significantly overestimated.

Strong Fundamentals of Core Businesses

In its latest model, Bernstein further strips out AI business to clearly outline Oracle's standalone core business value. Even completely removing AI data center-related income, relying solely on traditional database, SaaS, and OCI businesses, Oracle’s total revenue can still reach $101 billion by FY2030.

More critically, even after accounting for interest costs of debt raised for AI infrastructure (including the recent $25 billion financing), earnings per share can still reach $9.0. Based on the 27.3x P/E of software peers like Microsoft, SAP, and Salesforce, this earnings outlook implies a $137 per share valuation. In other words, even if the AI business goes to zero, Oracle’s core business alone supports about 85% of the current share price, showing the strength of its core cash generation capability.

Bernstein believes that the current Oracle share price is already heavily discounting pessimistic expectations, and the risk-reward ratio is entering a highly attractive range. With the recent $25 billion in debt and an equal amount of equity financing secured, the funding bottleneck for data center construction has been materially resolved. The report emphasizes that as long as the world does not fall into an extreme "AI winter" scenario, the current valuation offers investors ample safety margin and asymmetric upside potential.

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The above content is from ZF Trading Desk.

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