Oracle (ORCL)

Enterprise software giant Oracle (NYSE:ORCL) fell short of the market’s revenue expectations in Q3 CY2025, but sales rose 12.2% year on year to $14.93 billion. Its non-GAAP profit of $1.47 per share was in line with analysts’ consensus estimates.

Company Overview

Starting as a database company in 1977 and now powering mission-critical systems across the globe, Oracle (NYSE:ORCL) provides enterprise software and hardware products and services that help businesses manage their information technology needs.

Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.

Oracle competes with major technology providers including Microsoft (NASDAQ:MSFT), Amazon Web Services (NASDAQ:AMZN), Google Cloud (NASDAQ:GOOGL), IBM (NYSE:IBM), and SAP (NYSE:SAP) in enterprise software and cloud services. In healthcare IT, following its Cerner acquisition, Oracle also competes with Epic Systems, Allscripts (NASDAQ:MDRX), and athenahealth.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Oracle’s 8.5% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the software sector and is a tough starting point for our analysis.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Oracle’s annualized revenue growth of 7.6% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, Oracle’s revenue grew by 12.2% year on year to $14.93 billion but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 19.1% over the next 12 months, an improvement versus the last two years. This projection is particularly noteworthy for a company of its scale and indicates its newer products and services will fuel better top-line performance.

In addition to reported revenue, it is useful to analyze RPO, or remaining performance obligations, for Oracle because it shows the value of contracted services to be delivered in the future. It therefore gives visibility into future revenue.

Oracle’s RPO punched in at $455.3 billion in Q3, and over the last four quarters, its growth was fantastic as it averaged 128% year-on-year increases. This alternate topline metric grew faster than total sales, which likely means contracted services not yet delivered are growing faster than services already delivered (the criteria for revenue recognition). That could be a good sign for future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Oracle is quite efficient at acquiring new customers, and its CAC payback period checked in at 34.4 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a strong brand reputation due to its scale, giving it more resources pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like Oracle, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Oracle’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 69.7% gross margin over the last year. That means Oracle paid its providers a lot of money ($30.34 for every $100 in revenue) to run its business.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Oracle has seen gross margins decline by 2.6 percentage points over the last 2 year, which is among the worst in the software space.

In Q3, Oracle produced a 67.3% gross profit margin, down 3.4 percentage points year on year. Oracle’s full-year margin has also been trending down over the past 12 months, decreasing by 1.6 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Oracle has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 30.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Oracle’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Oracle generated an operating margin profit margin of 28.7%, down 1.3 percentage points year on year. Since Oracle’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Oracle’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10%, meaning it lit $9.96 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments (i.e., stocking inventory, building new facilities) are the primary culprit.

Oracle burned through $362 million of cash in Q3, equivalent to a negative 2.4% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but it’s still above its one-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Looking forward, analysts predict Oracle will generate cash on a full-year basis. Their consensus estimates imply its free cash flow margin of negative 10% for the last 12 months will increase to positive 2.3%, giving it more optionality.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Oracle burned through $5.88 billion of cash over the last year, and its $91.32 billion of debt exceeds the $11.01 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Oracle’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Oracle until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Oracle blew past analysts’ remaining performance obligation expectations this quarter. We were also happy its EBITDA narrowly outperformed Wall Street’s estimates. On the other hand, its revenue slightly missed and its billings fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.6% to $290.93 immediately following the results.

Updated: December 3, 2025 at 11:53 PM EST

Before making an investment decision, investors should account for Oracle’s business fundamentals and valuation in addition to what happened in the latest quarter.

Oracle doesn’t pass our quality test. First off, its revenue growth was weak over the last five years. And while its impressive operating margins show it has a highly efficient business model, the downside is its growth is coming at the cost of significant cash burn. On top of that, its operating margin hasn't moved over the last year.

Oracle’s price-to-sales ratio based on the next 12 months is 8.3x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $342.28 on the company (compared to the current share price of $208.04).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.