Morgan Stanley maintains "Neutral" rating on Oracle (ORCL.US): OCI performance meets expectations, but structural pressure on gross margin remains a valuation constraint

According to Golden Ten Data APP, Morgan Stanley analyst Sanjit Singh maintained a "Neutral" rating and a $210 price target for Oracle (ORCL.US) in his latest report. The report's title precisely summarized the core contradiction in this earnings release: "OCI performance meets expectations, but gross margins need improvement."

Previously, Oracle delivered an almost flawless Q1 fiscal 2027 earnings report. Revenue was $19.35 billion, up 30% year-on-year; cloud infrastructure (OCI) revenue reached $7.4 billion, surging 121% year-on-year; over $30 billion in new AI cloud contracts were added in a single quarter; remaining performance obligations (RPO) soared to $664 billion, a year-on-year increase of $209 billion. However, the stock price reaction triggered by this earnings report became the most dramatic "V-shaped sample" among technology stocks recently—up nearly 8% after hours, but closing down 1.74% the next day, with a cumulative decline of over 20% for the year.

As the gap between operational excellence and stock performance widens, Oracle is facing not just a win or loss from one earnings report, but a fundamental questioning of whether the "AI infrastructure business model can be accepted by Wall Street."

Morgan Stanley's "Neutral" stance is not a denial of Oracle's AI narrative, but rather a cautious "wait for validation." The firm recognizes that OCI capacity delivery is distributed across multiple locations and does not rely on a single project; acknowledges an average 20% premium on GPU contract renewals, indicating that the company has pricing power rather than being forced to renew; and also recognizes that the completion of the $20 billion equity financing plan has eliminated short-term equity dilution pressure.

But Morgan Stanley's core reservation lies in this: the gross margin of the AI infrastructure business has yet to prove it can reach the high levels of the company's traditional software business. As the proportion of cloud infrastructure revenue continues to rise, the structural downward pressure on overall gross margin will inevitably increase.

The Real "Elephant in the Room": $28.5 Billion in Capital Expenditure and Negative $5.4 Billion Free Cash Flow

This is the fundamental reason for the disconnect between the stock price and the company's fundamentals. Oracle's capital expenditure for the quarter soared to $28.5 billion, more than double the $8.5 billion from the same period last year. Free cash flow sharply deteriorated from negative $362 million in the same period last year to negative $5.4 billion. The company's debt now totals $125 billion.

The full-year capital expenditure guidance remains in the $90 billion to $95 billion range. Management expects net capital expenditure in fiscal 2027 to be about $70 billion, significantly higher than the $55.7 billion of the previous fiscal year.

The crux of the issue is this: When a company burns nearly $30 billion each quarter to build data centers, and although revenue growth is strong, it's far from enough to cover this level of capital consumption, investors need a clear timeline for "when positive free cash flow can be generated." Oracle's current answer is "once the ramp-up phase is reached"—but how long will this take? Can capital markets' patience last until that moment?

Morgan Stanley's report clearly pointed out that gross margin and free cash flow conversion in the AI infrastructure business are the key variables determining whether Oracle's valuation can move from "Neutral" to "Overweight."